Eric Nuttall of Sprott Asset Management has a warning for energy investors: The worst isn't over yet. But that doesn't mean you should wait it out. The lead portfolio manager of the Sprott Energy Fund is fully invested in Canadian oil stocks (after being 70 per cent in cash twice last year), based on a belief that the current oil price below $30 (U.S.) a barrel is "unsustainable." While Mr. Nuttall admits he jumped back in the market too soon, he's counting on a "meaningful price recovery" in the coming months.
What's your prediction for the price of oil?
I think oil will rally to over $50 by the end of this year. There will be volatility between now and then. I think the floor price will be in the next two to three months. I can see a scenario where the market rebounds in the second or third quarter.
How low do you think the price of oil will go?
I have no idea. I never thought we'd be at $30.
How is today's oil market collapse different than in 2008?
It's way worse. The losses are larger, which is staggering, and it's occurring in a more compressed time frame. There are names that have fallen 80 to 90 per cent in the past three months. Look at Boulder Energy Ltd., for example, which is down 80 per cent. Paramount Resources Inc. is down 72 per cent. In December, I had my best and my worst day in the history of managing the fund in over five years. I had a down-11-per-cent day and an up-10.5-per-cent day.
This month, I'm having my worst month in the history of managing the fund, and it's only been two weeks. I'm not going to tell you how much – it's embarrassing.
Did you jump back in too early?
Yes. Anybody who has had exposure at any time in the past year has been too early.
What stocks are you buying?
I'm buying stocks that have fallen 70 to 90 per cent from six to nine months ago, with the belief they can rally from 50 to 100 per cent by the end of the year. My key holdings include Crescent Point Energy Corp., Bonterra Energy Corp., Whitecap Resources Inc., Baytex Energy Corp. and Cardinal Energy Ltd.
Why are you only buying Canadian energy stocks?
People see a $29.68 oil price and forget that a Canadian company has its costs in Canadian dollars, and sells product in U.S. dollars. When you convert that back into Canadian dollars, you get about a 45-per-cent uplift. At today's price, [and including the Canadian oil discount when sold in U.S. dollars of about $3], that's almost a $40 oil price, versus $30 for a U.S. company. I see absolutely no reason to be in U.S. producers.
How has your investing style changed in this market?
As the stocks rally, I typically sell into strength and deploy cash on weakness. It will be different this year. I'm terrified of missing the turn. I think it will be violent to the upside and occur in a very compressed time frame. There could be more downside, but if I'm correct in my call on the commodity, I'm willing to suffer through the remaining downside and be patient to benefit from the much greater upside.
Are you short any stocks?
Not today. I was short some land drillers earlier this month and made some money. Given how far things have fallen, I don't feel compelled to be either short or to have cash. I want to be fully invested, to be as exposed as possible when the turn occurs, with the admission that I could be early by another month or two.
What's your advice to average investors?
The biggest risk today isn't being invested in energy stocks. It's not being invested in energy stocks. Given the magnitude of how far many of these stocks have fallen, I don't know if there will necessarily be the magical pullback people need to buy. That means if they aren't already in before the lows, they could miss the run. I've seen that many times and have been guilty of that myself with stocks.
This interview has been edited and condensed.