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Top Energy Stocks to Watch: Eric Nuttall’s August 2024 Selections

Eric Nuttall’s Strategic Picks: Navigating the Energy Market with Tamarack Valley, Nuvista, and ARC Resources

•• 5 Min
Top Energy Stocks to Watch: Eric Nuttall’s August 2024 Selections

In the ever-volatile energy sector, Eric Nuttall stands as a beacon of insight and strategic foresight. As a partner and senior portfolio manager at Ninepoint Partners, Nuttall has consistently provided valuable perspectives on the oil and gas industry. His latest top picks for August 16, 2024, reveal a calculated approach to navigating the complexities of the energy market. With a focus on Tamarack Valley, Nuvista, and ARC Resources, Nuttall’s selections are not just stocks—they are a reflection of his deep understanding of the market’s dynamics and future potential.

Market Outlook: A Contrarian's Playground

The energy sector has been the top-performing sub-index in Canada year to date (YTD). This performance has created generational wealth for investors who dared to bet on this volatile market. Yet, despite its success, energy remains a contrarian investment. How can this be? Nuttall points to ongoing constructive fundamentals that support the sector, despite the shadow of recessionary fears and a notable weakness in Chinese diesel demand. Oil demand, however, remains steady, up approximately 1.2 million barrels per day.

While demand figures are crucial, Nuttall emphasizes that the real story lies in the supply dynamics. U.S. shale production growth is faltering, and OPEC+ appears unlikely to return curtailed volumes as previously advertised. The organization's ability to remain "preemptive, proactive, and precautionary" keeps them nimble, ready to adjust to market changes. Even with the full return of OPEC+ barrels, which Nuttall does not see as the base case, he believes oil prices have a fundamental floor around $80 per barrel of West Texas Intermediate (WTI).

A significant shift is occurring in the energy sector: more companies are reaching their final debt targets and pivoting to returning capital to shareholders. This shift is no longer an exception but the norm, with 75-100% of free cash flow being funneled back to investors, primarily through share buybacks. Nuttall highlights the strong correlation between share buybacks and positive price performance, underscoring the importance of this trend in driving stock valuations.

In Nuttall’s view, Canada continues to offer more attractive opportunities than the U.S. He favors oil over natural gas and mid-cap companies over their large-cap counterparts. With free cash flow yields ranging from 14% to 26% at $80 WTI and $3.50 NYMEX, the Canadian energy market presents compelling value propositions.

Top Picks: A Deep Dive

Tamarack Valley (TVE TSX): A Re-Emerging Star

Tamarack Valley has officially clawed its way out of Nuttall’s “dog house.” After meeting or exceeding expectations for two consecutive quarters, the company has regained investor confidence. Continued deleveraging has positioned Tamarack to increase shareholder returns to 60%, with plans to push this figure to 75% by the end of 2025. At $80 WTI and $3.50 NYMEX, Tamarack is trading at an impressive 18% free cash flow yield.

Nuttall sees a combination of share buybacks and modest production growth as catalysts for Tamarack’s re-rating. The company is currently trading at a forward multiple of 3.3 times, but Nuttall projects a re-rating closer to five times, which could push the stock price to between $7.00 and $8.30 over the next one to two years. This represents a potential upside of 72% to 106% at $80 WTI.

Nuvista (NVA TSX): A Long-Term Growth Story

Nuvista is on an ambitious growth trajectory, aiming to boost production from 85,000 barrels of oil equivalent per day (boe/d) to 120,000 boe/d by 2027. The company’s inventory depth allows it to maintain flat production for the next 20-25 years, providing a solid foundation for long-term growth.

Trading at a 2025/2026 free cash flow yield of 11%/16%, Nuvista is committed to returning 75% of its free cash flow to shareholders. Nuttall sees the company’s ongoing share buybacks as a powerful tool for compressing its trading multiple, potentially forcing a re-rating closer to five times. His one and two-year price targets for Nuvista are $20.60 and $26.70, representing potential upsides of 53% and 99%, respectively.

ARC Resources (ARX TSX): A Deep Inventory Play

ARC Resources is a standout in Nuttall’s portfolio, thanks to its deep inventory depth and long-term leverage to a secular bull market in natural gas. With over 20 years of premium inventory depth and four to five equivalents of their current Attachie development area, ARC Resources is well-positioned for sustained growth.

Trading at 4.5 times enterprise value to cash flow (EV/CF), ARC Resources is returning 70% of its post-dividend free cash flow to shareholders. Nuttall anticipates ongoing trading multiple compression driven by meaningful share buybacks, providing visibility for continued stock price appreciation.

Why These Picks Matter

What sets Nuttall’s picks apart is their resilience in the face of market adversity. Despite the headwinds facing the energy sector, these companies have demonstrated a capacity to adapt and thrive. Whether it’s Tamarack Valley’s turnaround, Nuvista’s ambitious growth plans, or ARC Resources’ deep inventory, each company offers a unique value proposition.

Share buybacks are more than just a tool for returning capital—they are a statement of confidence. Nuttall’s emphasis on companies with robust buyback programs reflects his belief that these actions are closely tied to positive price performance. By reducing the number of shares outstanding, buybacks can boost earnings per share (EPS) and drive up stock prices, benefiting long-term investors.

Nuttall’s preference for Canadian energy stocks over their U.S. counterparts is rooted in the favorable conditions of the Canadian market. With lower valuations, higher free cash flow yields, and a focus on shareholder returns, Canadian energy companies offer a compelling case for investment.

Conclusion

Eric Nuttall’s top picks for August 16, 2024, are a testament to his deep understanding of the energy market. His selections—Tamarack Valley, Nuvista, and ARC Resources—reflect a strategic approach to investing in a sector that, despite its challenges, offers significant opportunities for those willing to navigate its complexities. By focusing on companies with strong free cash flow yields, robust share buyback programs, and compelling growth prospects, Nuttall provides a roadmap for investors looking to capitalize on the evolving energy landscape.

Bloomberg

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