Stick With Canada In 2022, Top-Performing Energy Investor Says – ValueWalk Premium
Canada

Stick With Canada In 2022, Top-Performing Energy Investor Says

Looking at oil and gas stocks this year? Think small and Canadian, at least according to the world’s leading energy fund manager.

Q3 2021 hedge fund letters, conferences and more

Canada

“Canada is, I think, the place to be in 2022,” said Eric Nuttall of Toronto’s Ninepoint Partners LP. His C$950 million ($752 million) Ninepoint Energy Fund was Morningstar’s top-performing energy-focused fund in 2021, posting a 189% total return that blew away the S&P/TSX Composite Index’s 22%. The second-best performer, Canoe Energy Portfolio Class, is another Canadian energy-focused fund and posted a total return of 101% last year.

Nutall was helped by the overall surge in energy stocks, the best sector in the S&P 500 Index and S&P/TSX last year, and the more than 50% rebound in oil prices as economies reopened and the pandemic receded. The performance comes after a string of difficult — he calls them “soul sucking” — years investing in the oil and gas business.

“I just thought I had to make it to the other side, then I’d be the last man standing,” he said.

Energy investors in 2021 benefitted from what Nuttall called a “disproportionate” increase in smaller-cap Canadian energy companies like Baytex Energy Corp. and Cardinal Energy Ltd., both of which rose over 420% last year. But the fund’s most prescient trade was buying 53 million shares of beleaguered oil sands producer Athabasca Oil Corp. from Norway’s state oil company Equinor ASA in January 2021.

At the time, Athabasca had $450 million of debt maturing in February 2022. Its total market value was less than $80 million. But as oil prices rose and Athabasca’s cash flow improved, the company refinanced its debt, pushing almost $90 million in maturities out to October 2023 and an additional $350 million to 2026. The stock gained 600% last year.

Special One

Equinor spokesperson Ola Morten Aanestad described the divestment as a “financial investment,” adding that the fund has exited the oil sands industry but remains active in Canada’s offshore oil and gas production.

Athabasca chief financial officer Matt Taylor said in an email that the company’s balance sheet refinancing was a catalyst for the shares. “The stock’s performance and trading volume (in 2021) is reflecting this optimism and we have attracted a number of new investors like Ninepoint.”

Meanwhile, Nuttall is searching for similar deals to boost his returns for this year. But he acknowledges it will be difficult to come up with another Athabasca.

“That one was special,” he said.

Despite breaking out in 2021, Canadian oil and gas companies trade at lower valuations, an average of 16.11 times their earnings, than their U.S. peers, trading at 21.49, according to data compiled by Bloomberg.

Nuttall said the country’s producers can “force a re-rating” by using free cash flows from higher commodity prices to aggressively buy back shares and boost dividends. That would get the attention of fund managers who have exited the oil and gas industry due to concerns related to ESG investing strategies.

Read the full article here by Geoffrey Morgan, Advisor Perspectives


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