'Potential for more than 100% upside in energy stocks'

A portfolio manager is leaning on his 2015-16 experiences to formulate a response to the oil sector’s worst performance for 12 years.

Crude’s price crash towards the back end of 2018 was largely a reaction to OPEC raising production after President Donald Trump’s threat of sanctions on Iran, and general concerns about a global economic slowdown.

Fears of oversupply that drove down the price are showing signs of being allayed already this year, with shipping data showing that Saudi Arabia was delivering its announced cutbacks. Yesterday, Brent crude rose as much as 5.1% at about $56 a barrel, which is still 35% below the four-year peak it reached in early October.

Eric Nuttall, partner, senior portfolio manager of the Ninepoint Energy Fund, admitted that last year was a tough watch and the worst year of performance in his career. He highlighted six factors for why 2018 was so dismal:

1, It featured the sharpest liquidation in net speculative length in oil in 10 years;

2, The level of net speculative length (a proxy for sentiment) fell below when oil traded at $26/bbl [in 2016];

3) Many stocks fell by 50%+ during the past 5-6 months with many of them trading well below where they were when oil was at $26/bbl;

4) Stocks technically approached the most oversold levels since the financial crisis;

5) The energy sector fell to multi-year low weightings in all major indices, which equals a low-care factor.

Drawing on the similar disintegration of confidence in 2015, and oil’s drop to $26/bbl the following year, Nuttall plans to respond in a similar vein to how he did then and add to positions he feels will most benefit from “an inevitable turn in sentiment”.

He said: “We were willing to be early. The easy path to take then would have been to cash up, go large cap, buy pipeline stocks, etc. Instead we chose companies whose stocks had fallen well, well below what any sober investor would consider fair value under a reasonable oil price assumption. That is where we find ourselves again.

“The very best companies in Canada (and the US) have fallen to levels where very meaningful upside exists.”

Nuttall, therefore, repeats what he said in December 2015; that he remains bullish on oil and sees the potential for more than 100% upside in energy stocks this year. He concedes that to some that will sound like pure lunacy but stands by his belief that the fundamentals do not explain most of the decline in the oil price.

He added: “Yes, the market loosened but that situation is being fixed by the announced 1.2MM Bbl/d OPEC+ cut in November. While uncertainties remain on the outlook for the global economy in 2019, we believe the market is overlooking the demand stimulus that sub-$50 oil would bring and the significant negative impact on US production growth that $40 oil would result in (Midland, TX gets a $7 discount to $47WTI).

“OPEC spare capacity relative to global demand of 100MM Bbl/d remains at a near historic low and in 2020-2024+ non-US/OPEC production is still going to go into a multi-year decline due to an implosion in investment on long lead projects. All of those factors mattered not that long ago. They will again.”

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