Sprott's Thoughts

Oil and Gas Has Swung ‘Severely Bearish’: Eric Nuttall

North American oil and gas companies experienced a severe correction this summer, following a run-up through the first half of the year. The S&P/TSX Capped Energy Index ETF, which tracks the North American oil and gas sector, is down around 14% since late June.

In a recent update, Sprott oil and gas analyst Eric Nuttall writes that this could be an attractive entry point into this market:

I’ve been deploying cash at an aggressive pace over the past couple of weeks, following what proved to be a vicious energy sector sell-off.

Sentiment has now swung severely into the bearish camp. In my experience, it is in times like these that you can get the best upside relative to your risk -- as valuations are likely to improve from here.

In my opinion, the decline in energy stocks had nothing to do with any change in fundamentals. Instead, it has been driven by concerns surrounding the overall stock market, a strengthening US dollar – which is bad for US oil producers --, and stale data points on oil demand being mistaken for up-to-date information. The market is looking at 5-month-old data that indicated weakening demand from Europe and China. That trend has since dissipated, and real-time data shows a strong rebound in oil demand. While the groupthink still holds that demand is weak, it’s not.

Besides ‘stale data’ weighing on sentiment, there have been over $3.5 billion in energy stock issuances in the past several weeks (PrairieSky Royalty, Crescent Point Energy, Whitecap Resources, Cardinal Energy, and Tamarack Valley Energy). Funds and investors have used up a lot of their cash buying into these issuances. As a result, there was less cash to buy stocks on the regular markets, which has aggravated the downturn in the short term.

I am interested in deploying cash into solid companies that have fallen by over 20% since early September and are sitting at their 200 day moving averages.

It’s too early to take on the riskier companies – so I’m sticking to the top of quality food chain for now. I’m not calling a bottom yet, but I remain a long-term bull on the energy market, particularly in the Canadian oil patch.

As we reported earlier this week, there is substantial long-term opportunity in oil and gas in North America, but in the last couple of months the sector has been beaten down.

Eric Nuttall reported earlier this year that he expected oil and gas – particularly unloved companies operating in the Canadian oil patch – to do well. Sure enough, it did. North American oil and gas surged higher as a whole for the first half of 2014. Eric still believes oil and gas will go higher in the long term, and suggests that the current pullback is an opportunity.

If you’re interested in energy stocks, especially oil and gas companies operating in the Canadian oil patch, it could be a good time to deploy cash.

Eric Nuttall is a Portfolio Manager with Sprott Asset Management LP. He joined the firm in February 2003, and over the years, his views on the oil and gas sector are frequently sought by the Business News Network (BNN), a regular contributor to Alberta Oil Magazine, often interviewed by The Globe and Mail, the National Post, the Calgary Herald, and has appeared in both the Wall Street Journal Asia and Barron’s.

Eric is Lead Portfolio Manager of the Sprott Energy Fund, and co-manages the Sprott 2013, 2014, and 2014 II Flow-Through Limited Partnerships with Jason Mayer. Eric is a key contributor to Sprott’s internal macro energy forecasts, and supports Sprott’s portfolio management team by identifying top performing oil and gas investment opportunities.