Oil well with the pump jack in action. Alberta

Recession be damned: Eric Nuttall remains bullish on oil, particularly Canadian producers.

Nuttall, partner and senior portfolio manager with Toronto-based Ninepoint Partners LP, said at the ninth annual ETFinsight Conference on Wednesday that Canadian oilsands firms are among the cheapest in the world despite their multi-decade reserves and strong balance sheets.

Canadian oil companies “are trading near their lowest valuations in [recent] history,” Nuttall said. “Yet you can buy into these businesses that are debt-free or almost debt-free, they’re generating the most amount of free cash flow in history, [and] they’re the most profitable they’ve ever been.”

Further, many producers are now prioritizing dividends and share buybacks as opposed to investing in growth. Nuttall estimated that in 2023 and at US$90 oil, the average Canadian oil company will be able to pay out a 12% dividend.

He forecast that at US$100 oil, the average oil company in Canada could be debt-free by the first quarter of 2023. “We’re trading at US$88, US$89 now, so maybe that’s deferred by a couple of months,” he said.

Investors are also mistakenly painting all producers with the same brush. Nuttall said valuations are similar for companies with varying levels of management competency, inventory depth and inventory quality, for example. “The ability to create alpha in this sector today … we feel is very good,” he said.

Nuttall said a carbon tax of $170 per tonne in Canada, the level set for 2030, would only cause him to discount his valuations on Canadian producers by 8% at most, assuming US$100 oil. He pointed out that the next government could choose to eliminate the tax altogether. (The carbon tax will be $65 per tonne as of April 2023.)

In general, Nuttall calls oil investing a “generational opportunity” because of a structural supply and demand mismatch — even as developed economies and producers themselves set net-zero emissions targets.

His analysis has shown that even if demand and supply for alternative energy soar, oil demand will continue growing to 2034. Meanwhile, inventories are at multi-year lows, the unstable price of oil has dissuaded major producers from investing in new capacity and “OPEC is publicly saying it has no more spare capacity,” he said.

Nuttall said any new capacity will take at least six years to come online, setting up a multi-year bull run for oil and a fundamental oil price floor of US$100.

When asked, Nuttall said the biggest threat to his thesis would be a sudden and prolonged demand shock like a global pandemic or a deep financial crisis.