Eric Nuttall, Portfolio Manager at Sprott Asset Management
Focus: Energy and small-cap Canadian stocks
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Market Outlook
OPEC and Saudi Arabia’s decision to cut production at their next meeting in November was the biggest development in the oil market in over two years. The enormous fiscal and social challenges faced by OPEC members give me comfort that a cut will be both enacted and enforced, at least in the short-term. We still see $60/bbl in 2017 and believe there remain 40 to 50 per cent plus in several oil and service stocks. The Sprott Energy Fund is the #1 energy fund in Canada on a YTD, one-year and three-year basis, and we have outperformed the S&P/TSX Capped Energy Total Return Index by 9 per cent per year, after fees, for three years.

Top Picks

Cardinal Energy (CJ.TO)
Cardinal energy offers investors who are bullish on oil the offensive characteristics of high revenue leverage to a rising oil price as well as imminent drilling catalysts, while also offering the defensive characteristics of low financial leverage (D/CF < 1X), a low decline rate, highly attractive capital efficiencies and a conservative management team. We believe fair value one year out surpasses $15.00 per share.

Canyon Services (FRC.TO)
Service stocks bottom and reach an inflection point when service prices start going up. That milestone was reached in the past few weeks and given the growing completion intensity within North America, oil surpassing the psychologically important $50/bbl level, a fleet that has sat idle and will require time and money to get back into working condition, and a labour force that has been decimated (>150,000 layoffs in the service area in North America), this area of the services space will tighten much faster than most believe possible. Canyon trades at 5.2X consensus EV/2018 EBITDA versus a mid-cycle multiple of 7X = $7.30/share. Should the market tighten even further and the demand for Canyon’s services get back to just 75 per cent of 2014 level, the stock would surpass $8/share.

Birchcliff Energy (BIR.TO)
Birchcliff is slowly regaining interest from the investment community as people begin to appreciate the transformation that the company has gone through over the past several months subsequent to a major acquisition from EnCana and a deleveraging equity issuance. The stock still trades at a wide discount to other Montney producers and this, we believe, will narrow over time. On our estimates for 2017 ($60/bbl oil, $3.25/mcf gas) BIR trades at 6.3X 2017 EV/CF when its peers trade at over 8X. We believe BIR has the potential to exceed $16/share by 2018, which would offer over 75 per cent upside.
 

Disclosure Personal Family Portfolio/Fund
CJ Y N Y
FRC N N Y
BIR N N Y


Past Picks: October 22, 2015

Northern Blizzard (NBZ.TO) – no longer own

  • Then: $5.13
  • Now: $3.71
  • Return: -27.68%
  • TR: -18.86%

NYX Gaming (NYX.TO) – still own in the Fund and personally

  • Then: $2.54
  • Now: $1.99
  • Return: -20.65%
  • TR: -21.65%

Air Canada (AC.TO) – no longer own

  • Then: $11.33
  • Now: $12.17
  • Return: +7.41%
  • TR: +7.41%

Total Return Average: -11.03%
 

Disclosure Personal Family Portfolio/Fund
NBZ N N N
NYX Y N Y
AC N N N


Fund Profile: Sprott Energy Fund

Performance as of October 6, 2016:

  • 1 year: Fund 55.9%, Index* 29.5%
  • 3 years: Fund 3.1%, Index* -6.0%
  • 5 years: Fund 3.8%, Index* -0.7%

* Index: S&P/TSX Capped Energy Total Return Index
* Returns are after-fees and includes reinvested dividends


Website: www.sprott.com