Eric Nuttall Eric Nuttall: Europe's Energy Mess Should Wake Investors Up to Enormous Opportunity in Oil & Gas Stocks
Universally misunderstood sector offers huge potential to make outsized returns
Eric Nuttall
Sep 29, 2021
Stuck in an apathetic coma resulting from too many years of poor stock-price performance, energy ignorance, and environmental, social and governance pressures, generalist investors continue to ignore the generational opportunity right before their eyes.
Trading at their lowest valuation levels in 20 years, I believe Canadian energy stocks represent deep value amid the backdrop of an overwhelmingly positive outlook for oil in the years ahead. What will it take for generalists to come back to a sector widely abandoned, as the sector gears up for a rerating in valuations closer to historical levels that could likely result in well over 100 per cent upside for energy stocks?
We stand on the cusp of meaningful returns to shareholders and this bold and meaningful action on the part of corporates may shake generalists from their catatonic state.
With the current oil price of over US$70 West Texas Intermediate the amount of free cashflow being generated by the energy sector is remarkable.
Both behind closed doors and in the open arena of social media, energy investors have successfully lobbied for the necessity of energy companies to change their business models, shifting from pursuing production growth to that of maximizing free cashflow, thereby allowing for significant dividend increases and share buybacks.
At US$70 of a basket of 24 Canadian energy stocks that I model, the average company could pay a 17 per cent dividend using only 50 per cent of its free cashflow, while allowing for further meaningful deleveraging. Even crazier? The average company using the current oil price could effectively privatize and become debt free with just 4.9 years of free cash flow, plus offer plenty of upside given that zero value is being ascribed to its long-term assets due to “stranded asset risk.” Isn’t that a massive opportunity?
Energy ignorance has, in my opinion, created a misinformed view that we are in the twilight years for oil and that the energy sector is a sunset industry.
Fighting this narrative is only a matter of time as the inevitable challenges of the energy transition become more apparent, most recently in Europe where a grid based upon unreliable renewable energy sources has resulted in skyrocketing energy prices and shortages of diesel, meat, and, unfathomably, even beer.
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