Crude Oil: Energy is the top performing sub-index in Canada year to date (YTD), has created generational wealth for some over the past four years, and is supported by ongoing constructive fundamentals, yet remains a contrarian investment. This is perplexing. Despite (once again) recessionary worries and obvious weakness in Chinese diesel demand, oil demand remains “fine,” up about 1.2 million Bbl/d. “The real story is on supply: U.S. shale production growth is imploding while OPEC+ is unlikely to begin to return curtailed volumes in October as advertised given its propensity for being “preemptive, proactive, and precautionary” and its ability to stay nimble to market vagaries.” Even assuming the full return of OPEC+ barrels as advertised, which is not our base case, we believe oil has a fundamental floor of around US$80 West Texas Intermediate (WTI) given that “days of supply” of global oil inventories will stay below normal levels.
With each passing month, more companies are hitting their final debt targets and pivoting to higher “return of capital.” The norm now is 75-100 per cent of free cash flow being returned back to shareholders, primarily in the form of share buybacks. Any misbelief that companies are not “walking the talk” is misplaced, and there is a strong correlation between share buybacks and positive price performance. We continue to favour Canada over U.S., oil over natural gas, and midcap over large cap, and continue to add to names which by our estimates at $80 WTI and $3.50 NYMEX are trading at 14 per cent-26 per cent free cash flow yields.
Eric Nuttall on BNN.ca Market Call Friday August 16th 2024 |
