Eric Nuttall, portfolio manager at Sprott Asset Management

Focus: Energy stocks
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MARKET OUTLOOK
Energy investors are collectively in a “wait and see” mode pending a confirmed OPEC production cut extension this Thursday and more pronounced inventory drawdowns both in the U.S. and globally. Given significant underperformance YTD versus other sectors and very little investor participation at the moment, we see the potential for a strong sector rotation tailwind later in the year. Sentiment is borderline despondent and it has been 29 years since the energy sector was negative in the first four months of the year; this mismatch between a positive fundamental backdrop and lousy sentiment is offering the potential for strong returns in 2H’17.

TOP PICKS

TRICAN WELL SERVICES (TCW.TO) – Last purchased April 27 at $3.80
After an incredibly difficult 2016, TCW and other pressure pumpers are now enjoying a strong rebound in demand, which is resulting in significant pricing traction. TCW was able to pass through a 14 per cent price increase in Q1 with more increases to come and is largely committed on manned equipment for the rest of the year. We believe the industry will remain tight in a $50/bbl world for at least the next year and as a result, margins will continue to expand. TCW trades at 4.5x our 2018 estimate (after giving $350-million value for its holding in FRAC) versus a mid-cycle valuation of 7x. We think TCW will trade to $7/share in the next year, which would equal to 60 per cent potential upside.

PROPETRO HOLDING CORP. (PUMP.N) – Last purchased on May 12 at $12.31
PUMP is a pure-play pressure pumper in the Permian Basin. They have a tier 1 customer list and are 100 per cent exposed to the highest-growth basin in the world. Demand for their equipment is exploding and we think current and future pricing power is being underappreciated. The stock is trading at 4.4x 2018 consensus estimates and we think that as oil continues to appreciate, the stock could approach $20/share.

U.S. SILICA HOLDINGS (SLCA.N) – Last purchased May 3 at $37.64
SLCA is the safest and least volatile (relatively!) way to be exposed to the frac sand market in the U.S. Bulls and bears are locked in a ferocious debate about the potential for new regional sand deposits to displace more expensive, higher-quality sand from further away. We believe that even with strong growth from regional plays, the demand for frac sand will exceed supply for the next several years and both regional and northern sand will be required for the market to not be caught short. As a result, we believe the market is far too bearish and with the stocks down sharply, they offer an extremely compelling risk-to-reward. SLCA trades at 5.1x 2018 EBITDA and we think 2018 consensus EBITDA could be overly conservative by 20 per cent.
 

PAST PICKS: MAY 27, 2016

CARDINAL ENERGY (CJ.TO)

• Then: $9.78
• Now: $6.58
• Return: -32.71%
• TR: -29.63%

NYX GAMING (NYX.V)

• Then: $2.68
• Now: $1.14
• Return: -57.46%
• TR: -57.46%

DHX MEDIA (DHXb.TO)

• Then: $6.58
• Now: $6.07
• Return: -7.75%
• TR: -6.95%

TOTAL RETURN AVERAGE: -31.34%
 

WEBSITE: www.sprott.com