Important Message

You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering the Sprott Gold Miners ETF. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETF, you will be directed to the ALPS/Sprott website at www.SprottETFs.com

Continue to Sprott Exchange Traded Funds

Sprott Energy Fund

Market View: Feb 9/18

You would be forgiven if you’re feeling either a sense of deja-vu or nausea today after seeing energy stocks suffer another sharp selloff (we’re down 16% YTD after being up 5% earlier last month; energy index is -13%).  Different this time is the obvious  implosion in broader markets (DJIA -4.1% yesterday) which seems to have magnified the selling pressure in oil and energy stocks. What is different today when the XOP is trading only 5% away from the August lows when oil was at $46/bbl
 
Well, first oil is at $60/bbl. 
 
Second, inventories have been drawn down by the greatest extent in history and US surplus storage has fallen from 140MM Bbls in March to ~13MM Bbls. 
 
Third, every US oil company is coming out with capital budgets that show capital discipline, production growth constraint, and a renewed focus on returning capital to shareholders which means that US production growth will be more tame than historical standards. 
 
Fourth, oil demand growth is rocking with Goldman Sachs estimating growth of 2MM Bbl/d this year. 
 
Fifth, OPEC compliance remains very strong and likely to stay that way for all of 2018. 
 
Sixth, we are in a 4-5 year bull market for oil.
 
Where have valuations fallen to?  We entered into “cheap territory” a long time ago.  At today’s levels after the 20% sell off from the highs TWO WEEKS AGO (!) our service stocks (whom I met with last Friday…business is good!) have fallen by 25% YTD (and this being February 9th).  TCW now trades at an 18% free cash flow yield on 2018 and a 22% free cash flow yield on 2019 numbers.  They are buying back $100M of stock (10% of their outstanding) and I think they will buy back even more. 
 
We had a land driller report results yesterday which slightly missed expectations (Q1 estimates got revised down 2%) and the stock sold off by 14%.  This is a $4BN market cap company that lost $400MM of value for a $9MM miss due to very cold weather delaying work in January and UBS this morning actually INCREASED their 2018 estimates by 1%. 
 
Our oil producers in Canada (only a few of them) can on average buyback 15% of their outstanding stock with the free cash flow being generated today.  One pays a 10% yield already that is well covered.  On strip the average Canadian oil co is trading at 4.6X EV/CF when they used to trade at 7-8X.  Our US producers have been equally mauled, falling by up to 18% YTD.  In short there has been nowhere to hide.
 
Given the extent of the sell off after a horrible 2017 people have clearly given up on the space.  What is very odd with this is that oil a week ago was trading at a 3.5 year high and even today, after the correction, the oil strip is over $50/bbl out past 2021.  Companies are trading at their lowest valuations in memory and are starting to step up to the plate and buy back their own shares given the very significant disconnect between how their companies are doing and how their stocks are doing.  We continue to encourage this action with all of our holdings.
 
We are in a multi-year bull market for oil.  Fortunes are made when people take advantage of the disconnect between perception and reality.  Admittedly, this is the absolute hardest thing to do and the lag time can take longer than one ever thinks possible (like right now).  The stop gap is now corporate buybacks.  If the investment public won’t step up and buy shares, then the corporates will, and we are seeing this in action today.
 
Eric

 

 

COMPOUNDED RETURNS (%) AS AT JANUARY 31, 20181

1MTH YTD 3MTH 6MTH 1YR 3YR 5YR 10YR ANNUALIZED INCEPTION (04/15/04)
Sprott Energy Fund, Series A -4.4 -4.4 0.2 11.5 -30.2 -8.3 -4.4 -4.9 2.3
S&P/TSX Capped Energy TR -4.0 -4.0 -3.8 5.4 -6.3 -2.4 -3.4 -2.7 3.3

1 All returns and fund details are a) based on Series A units; b) net of fees; c) annualized if period is greater than one year; d) as at January 31, 2018; 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 Sprott 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 A units of the Fund for the period ended January 31, 2018 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.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: RBC Investor & Treasury Services: Tel: 416.955.5885; Toll Free: 1.877.874.0899