Surge Energy Inc (Alberta) T.SGY

Eric Nuttall

[Carjack]

Eric Nuttall

 

@ericnuttall

 

 

"We remain bullish"...just not by as much as we were earlier this year. Why? We were right on 2 calls: global oil inventories reaching multi-year lows + demand vastly exceeding the ongoing bearish narrative (recession=demand destruction). What did we get wrong? The quantum of supply growth, namely from US and Iran. US supply is outpacing expectations due to moderate efficiency gains, but mainly (2/3 of the growth) from privates goosing production ahead of sales processes (leading to inventory exhaustion). This is non-repeatable. Secondly, Iranian exports are up 0.4MM Bbl/d YTD due to the WH turning a blind eye to sanction enforcement. So, while inventories sit at multi-year lows, the "how did we get here?" is equally as important. We have more spare capacity to chew through in 2024 than initially thought, so the ceiling price is lower ($90?). This does not make us bearish on energy stocks. We estimate the sector trades at a 13% free cashflow yield and 3.9x EV/CF at $80WTI. Further, balance sheets are in great shape positioning companies to still return incrementally more FCF back to shareholders. A rangebound market in 2024 ($80-$90?) means stock picking will be critical. Looking at the entire energy complex (oil, natural gas, services), we remain optimistic on the year ahead! "We remain bullish."