In a recent interview on BNN, Eric Nuttall of Sprott Energy Fund stated that the recent OPEC agreement was the start of the next major up-leg in the price of oil. He stated that OPEC’s November 30th meeting in Austria was the final potentially negative factor that could harm the oil market, and this should clear the way for US$60 oil in Q1 2017.
This may seem like a bold prediction, but Nuttall has had a solid track record of performance: his fund is up over 65% year-to-date, nearly doubling the energy index, and he successfully called the current oil price (about US$50/bbl) on December 31 of last year.
Most importantly, however, is the fact that there are sound fundamentals supporting strength in oil over the next few months. OPEC recently agreed to cut 1.2 million bpd of production (with non-OPEC producers potentially kicking in another 600,000 bpd). The market has largely responded with skepticism to this cut, which is why oil prices only saw a modest rally after the agreement was set.
The vast majority of investors were skeptical that OPEC could even come to any agreement, and the market is set to, once again, be surprised when OPEC shows more adherence to a cut than the market is expecting.
Of the 1.2 million bpd of production that was targeted, 750,000 bpd—the majority—will come from Saudi Arabia and its Gulf State allies. Looking at previous OPEC cuts, these countries have always complied.
Moreover, on the non-OPEC side, Mexico is set to cut 200,000 bpd, and this will result in nearly million bpd removed from the market when combined with the Saudi and Gulf state cuts. This assumes that Russia, Iraq, and other producers contribute nothing (an unlikely outcome). Global storage is already declining, and these cuts will only accelerate this process as oil moves into the first quarter of 2017 (a seasonally strong period for oil prices).
With a strong backdrop of oil prices, Canadian investors need to know how to play the rise. It is good to own a diversified mix of high-quality names that have good leverage to rising oil prices along with some defensive characteristics.
Crescent Point has done well over the past couple of weeks, but it’s still trading at a large valuation discount to its peer group, which makes Crescent Point an excellent play on rising prices (as prices rise, investors should gain more confidence in the stock and close the discount to its peers).
Crescent Point currently has an enterprise value that is 7.3 times its 2017 debt-adjusted cash flow (this is a common way to value oil stocks). Crescent Point’s peers trade at an average of 9.5 times their enterprise value. This discount is largely due to the market punishing Crescent Point for issuing shares in the fall. Crescent Point used the proceeds to fund a production program in 2017 and protect its balance sheet, but the market was unhappy due to the dilution that occurs from issuing stock.
The recent rally in Crescent Point shares shows that investors may be forgiving the company, and Crescent Point just announced its 2017 guidance, in which it is planning 10% production growth–a significant boost from its previous guidance with only a small boost in planned capital expenditures.
With a best-in-class asset base, Crescent Point is an essential name to own.
Birchcliff Energy Ltd. (TSX:BIR)
Birchcliff produces about 77% natural gas, which gives investors exposure to both rising oil and gas prices. The stock has done excellent this year as investors are finally catching on, but it still trades at a discount to its U.S. peer group.
Birchcliff recently announced a five-year production plan, which would see production grow to 130,000 bpd in 2021 (over double 2016’s production of 50,000 bpd). This is predictable production growth, and Birchcliff has been able to initiate a dividend (the yield is about 1.2%) as a result.
These shares should continue higher as more investors catch on to the story in 2017, and as oil and natural gas prices continue to rise.