Ninepoint Energy Fund Marketview

July 6, 2022

Thoughts on the Pullback

It feels like we have time warped back to March 2020. Panic and fear is palpable, headlines about recessions abound, and oil stocks have violently sold off, losing the most since the dark days of COVID’s emergence. Are we seeing any fundamental evidence to support the selloff in oil? No.

We can measure this in two ways: the structure of the oil curve and inventories. Neither are showing signs of weakness:

So why the sell off? In speaking with the top trading desks, the vast, vast majority of selling has been algorithmic/CTA selling driven by inflationary expectations. Moving averages are being broken, technical signals flashing negative, and selling is begetting more selling.

We continue to believe that nothing has changed with our thesis, that oil is in a multi-year bull market, and that this pullback, while gut wrenching and premature age inducing, will pass. We remain extremely confident in what we own: a basket of nearly debt-free companies, trading at 1.5X enterprise value to cashflow and 44% free cashflow yields, and set to increasingly return that free cashflow back to us in the form of dividends and buybacks.

Given the extent of the market undersupply, measured yesterday by Goldman Sachs (who is still sticking with their $140/bbl forecast) at 1MM Bbl/d, we believe that any demand destruction (something that we have been saying is NECESSARY to balance the market), will be more than offset with supply growth challenges going forward.

Energy stocks, or at least the ones we own, are discounting about $50WTI (or lower), and even if oil were to sell off as Citi was forecasting yesterday in the event of a recession, are still trading at highly compelling levels.

Undoubtedly, the past few days have been terrible to have to go through, but unfortunately are not uncommon in bull markets (see below). Positioning/CTA selling/ panic are dominating the tape and we did not anticipate a drawdown of this magnitude. What gives us comfort is the strength of balance sheets, the commitment to increase dividends and buybacks ($8BN in share buybacks were enacted in Q2 alone), and the consensus of opinions of those whom we respect (Energy Aspects, RBC, Cornerstone Analytics) that nothing fundamentally has changed. The short-term can be driven by fear, but it is fundamentals and free cashflow that will rule in the end.

We remain bullish.

Eric Nuttall 
Senior Portfolio Manager
Ninepoint Partners

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at June 30, 2022. 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 Ninepoint 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 F units of the Fund for the period ended June 30, 2022 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.

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