Despite being in a multi-year bull market for oil, herd mentality has taken over as fears around a potential Border Adjustment Tax by the Trump administration have led to the pummelling of Canadian oil stocks with many falling by 15 per cent+ this month. We do not believe the U.S. president will push through a BAT that includes oil, as it would increase the average household’s gasoline expense by $300-$400/year and would be highly politically unpopular and counterproductive to his re-industrializing of the American economy. As such, we view the risk-reward as extremely favourable for aggressive capital deployment. We are “all in” and believe we own stocks that have the potential to appreciate by over 60 per cent over the next 18 months. This month reminds us of January 2016 when people were panicking, stocks were imploding, and our will was tested from being fully invested. How did it turn out? The Sprott Energy Fund rallied by over 140 per cent from the lows seen in that month. Now is not the time for panic; it is the time for disciplined investment and a
SPARTAN ENERGY –
We believe a very large U.S. seller has been responsible for the stock falling by 16 per cent this month and is the poster child for what has happened to Canadian oil stocks due to worries around the Border Adjustment Tax. The stock now trades at 4.9X 2018 EV/CF on our commodity assumptions versus formerly trading at 8.0X. We see over 65 per cent upside in the stock over the next 18 months. SPE is a very low-risk way to play our multi-year bullish view on oil.
BIRCHCLIFF ENERGY –
Birchcliff Energy is at the beginning of a multi-year internally-funded ramp in production as it grows its core Montney production and explores a new liquids-rich zone. The company has never been in a better position to create long-term shareholder value given a much improved balance sheet, strengthened inventory, and exploration upside. The stock trades at 5.3X 2018 EV/CF at $3/mcf gas and we have an 18-month $13.30 target which equals over 60 per cent upside.
TRICAN WELL SERVICES -
Trican Well Services is benefitting from the beginning of the inflection in pressure-pumping pricing. Prices are up 20 per cent from the bottom and we believe could go up another 30 per cent to 40 per cent by year-end. They also monetized a portion of their interest in a U.S. pressure pumper called Keane which the street is mispricing. Giving a mark-to-market valuation on Keane, which we believe is worth $2.10/share, TCW is trading at 4.3X 2018 EV/EBITDA when a mid-cycle valuation is 7.5X. This would imply upside of over 50 per cent.it of patience. The Sprott Energy Fund is the #1 Energy Fund in the country on a one- and three-year basis as of December 30, 2016.
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