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Eric Nuttall

Partner and senior portfolio manager, Ninepoint Partners LP, Toronto

Eric Nuttall faced the most brutal oil price crash of his career in early 2020, but he stuck with his bullish commodity conviction. By this fall, the price of West Texas Intermediate (WTI) crude had rebounded to around US$80 per barrel after turning negative briefly last year. His $780-million Ninepoint Energy Fund, which has an ETF version and focuses mainly on small- to mid-cap stocks, has posted a hefty, triple-digit gain over the past year. It has also outpaced the S&P/TSX Capped Energy Index, including dividends, since he assumed the helm of the fund in 2010. We asked the 42-year-old portfolio manager why he believes the oil party is just getting started, and why large caps, such as Cenovus and Suncor, are attractive too.

Adam Coish/The Globe and Mail

How did you cope with the oil price collapse caused by the COVID-19 pandemic?

It was really tough, particularly on March 9, 2020, after Saudi Arabia and Russia launched a price war just as demand was starting to implode. My fund fell 40% intraday. It was emotional mastery that allowed me to achieve what I did. Eric Sprott [the legendary precious metals investor] was a phenomenal mentor to me. His lessons allowed me to analyze a situation, lean on hard data, not be swayed by fear and have conviction. Never had I been so certain the energy sector offered multi-bagger potential than from March to May of last year.

What does your crystal ball look like now?

We are in a multiyear oil bull market for at least 10 to 15 years due to demand growth and supply challenges. U.S. shale oil companies have pivoted from production growth to pursuing free cash flow because investors want dividends and share buybacks. OPEC and its allies will largely be out of spare capacity by next fall because of insufficient investment in new production. And environmental, social and governance [ESG] pressure on the energy supermajors, such as BP and Royal Dutch Shell, is forcing them to let oil production fall to free up cash flow for offshore wind and solar energy. WTI oil hit a record high of about US$145 per barrel in 2008. I think we’ll get there again in three years.

Why do you feel that the oil party is just getting started?

We are waiting for the guest of honour—the large, generalist, institutional fund manager who has not been in the trade. Fear of missing out and underperforming is dragging those managers back into the sector. ESG pressure or not, a fund manager can’t chronically underperform. I think this enormous amount of buying power will lead to a re-rating of energy stock valuations from generational lows.

Why are Cenovus and Suncor in your top holdings now?

Many small- to mid-cap names are already up well over 100% this year. There is still multi-bagger potential in them, but having a large-cap component is more of a tactical positioning heading into year end. The large, generalist investors, who missed out on a huge run so far this year, must at least catch up to their benchmark. It’s much easier for them to go for the safety of a large-cap name that hasn’t performed as well. Of the large caps, I like Cenovus the best. The near-term catalyst for this energy producer, which acquired Husky Energy this year, is hitting its $10-billion deleveraging target and buying back shares.

Which small- to mid-cap energy company is compelling now?

Shares of Enerplus, which has exposure to the U.S. Bakken oil and Marcellus natural gas plays, trade at a deep discount to the company’s historical valuation. It took advantage of the low oil price earlier this year by making two acquisitions at the time of maximum pessimism. By the first quarter of next year, I think it will start returning capital to shareholders and be aggressive with share buybacks.

What is the biggest risk to your bullish outlook?

A vaccine-resistant strain of COVID-19 that leads to renewed lockdowns would impact demand materially in a short period. Medium to long term, it’s about substitutions for oil. Still, the runway to displace oil, whether it’s electric cars, renewable jet fuel or hydrogen for long-haul trucks, is measured in decades, not years. /Shirley Won

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