Ninepoint Energy Fund Market View

April 24, 2019

While early in developing this call I am beginning to see the potential that later this year the market’s focus will once again return to OPEC’s dwindling spare capacity and with it calls for $100+/bbl oil. The White House’s decision to cease issuing export waivers for Iranian exports in two weeks will theoretically reduce global supply by ~1.2MM Bbl/d (assuming 100% compliance). While Saudi Arabia this morning is reaffirming that they will make up for reduced Iranian exports (not preemptively like in 2018 that led to the oil price crashing) this would result in essentially the elimination of Saudi’s safety cushion (using a peak sustainable production level of 10.7MM Bbl/d versus the 11.1MM Bbl/d which included sales from inventories).

We estimate that Saudi Arabia, the UAE, and Kuwait have spare capacity of around 1.3MM Bbl/d using what we believe to be sustainable production levels versus current constrained levels due to December’s curtailment deal. At the same time, Venezuelan production continues to fall reaching multi-decade lows (the situation now appears to be a stalemate with no imminent regime change leading to a sudden spike in production) and Libya which is back to recent historic highs looks wobbly again due to Haftar’s advance on Tripoli. With US production growth constrained by the prioritization of dividend raises, share buybacks, and debt paydown versus growth and Brazil facing technical issues in its offshore plays the world is once again, just like this time last year, facing the possibility of the exhaustion of spare capacity. Even if there is cheating by some Iranian oil importing countries OPEC spare capacity would still amount to around 1.5% of global demand…a historically low level.

Given our views of the continued drawdown of global oil inventories the macro backdrop for oil remains very positive. With leading indicators in China perking up (March industrial production +8.5%...its fastest pace in 4 years, excavator sales +15.7% YOY, retail sales +8.7%, and bank loans +13.8%) and the growing possibility of a US/China trade deal in May/June worries about demand growth seem to be fading.

Our oil call coming into 2019 when oil was at $45/bbl was that we would hit $60/bbl sometime by mid/late-2019. We now believe that there is a solid floor around $60WTI with the possibility that we see $70-$75/bbl by the Fall. If the US is more effective than we are estimating and Iranian exports do in fact “fall to zero” then calls for the necessity of demand destruction via high oil prices ($100+/bbl) will return.

Given the ongoing disconnect YTD between oil (+46% YTD) and energy stocks we remain extremely bullish. Using $65/bbl oil many names are trading at 20%+ free cash flow yields and <4X EV/CF multiples (versus 7x-8x historically). Our trading desk contacts tell us that the tone amongst generalist investors started to improve about 2 weeks ago and fund flows (ie. actual buying) began on Monday. This is critical. Stocks can remain cheap forever if no one cares and if corporates are not willing to use their free cash flow to meaningfully buy back their shares (this is changing too). The Fund remains positioned in companies whose cash flows are most benefitting from the rise in the oil price and we are consistently in recent days doubling to tripling our peers which tells us that they are largely still hiding in lower beta large caps, integrateds, and utilities/midstream companies. Our goal is to be positioned in names that will be the first recipients of sector inflows as new money looks to enter the sector or those who have been in large caps look to go down cap.

Reach out directly with any questions.

Eric Nuttall
Partner, Senior Portfolio Manager


Source: Ninepoint Partners


Source: Ninepoint Partners

Source: Ninepoint Partners

Source: Ninepoint Partners

 

Ninepoint Energy Fund - Compounded Returns¹

1M YTD 3M 6M 1YR 3YR 5YR 10YR 15YR Inception
Fund -10.7% -14.4% -11.5% -20.4% -47.4% -26.5% -22.7% -4.4% -1.7% -1.2%
Index -6.0% -7.2% -11.0% -18.9% -34.6% -11.5% -15.0% -4.4% 0.7% 0.7%

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at March 31, 2019; e) 2004 annual returns are from 04/15/04 to 12/31/04. The index is 100% S&P/TSX Capped Energy TRI and is computed by Ninepoint Partners LP based on publicly available index information.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: concentration risk; credit risk; currency risk; cybersecurity risk; derivatives risk; exchange traded funds risk; foreign investment risk; inflation risk; interest rate risk; liquidity risk; market risk; regulatory risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; small capitalization natural resource company risk; specific issuer risk; tax risk.

Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), other charges and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. The indicated rate of return for series F units of the Fund for the period ended March 31, 2019 is based on the historical annual compounded total return including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

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