In the world of commodities, there are a few key points to keep in mind, supply discipline or lack of investment, the recovery of China and global economic uncertainty. Energy stocks are unlikely to repeat their performances from 2021-22, though relative outperformance versus the broad market may continue in 2023.
Oil demand remains relatively inelastic and represents less than 7.5 per cent of personal expenditures on average. On the production side, it has become clear that higher commodity prices are not causing the same supply response as in years past. Oil and gas producers have become much more conservative with capital allocation decisions, electing to direct a much larger portion of free cash flow to shareholder returns via dividends and share buybacks rather than growth capex.
The price of gold rallied in March, triggered by global bank concerns, as U.S. two-year yields recorded the largest decline since 1987, and on expectations for a lower March rate hike by the U.S. Federal Reserve. As uncertainty persists, this environment will remain supportive of current prices and gold will set new milestones above the US$2,000/oz mark. Gold returns have averaged 13 per cent in the 12-month periods following the last six recessions. While base metals are more susceptible to an economic slowdown, a key catalyst is a resurgence in demand from a reopening of China.
Over the long term, our thesis remains that the clean energy transition will be significantly mineral intensive for commodities such as uranium, copper, nickel, and lithium. There is a sharper focus on the security of supply amid rising geopolitical tensions, particularly around these key energy transition metals.
Headwater Exploration ($HWX)
Last purchased in April at $6.44.
Headwater is a mid-cap oil producer focused on one of the hottest plays in Canada, the Clearwater formation. It is budgeted to grow production by 40 per cent in 2023 and 25 per cent in 2024, while providing a six per cent yield, expanding inventory (10+ years) and maintaining $100 million cash (no debt) for land acquisitions. This is a very rare combination that should deliver a total return of 30 per cent. Roughly 25 per cent of the land base is developed and unallocated cash could build to 20-25 per cent of current market capitalization over the next couple of years.
Last purchased in February at $4.59.
Top tier intermediate growth gold company with low costs, solid track record of building mines and beating guidance. Just closed the Sabina $1.2 million deal launched in February, in a rare in-construction project with 2025 production from a Nunavut mine that will add over 300,000 ounces per year of gold. The Company has $600 million in net cash, and provides one of the best dividend yields in the gold space (4.5 per cent) and organic growth. B2 currently trades at a justifiable premium to peers.
Trican Well Service ($TCW)
Last purchased early April at $3.00.
The only publicly traded pure-play frack services provider in Canada. Offers leverage to increases in Canadian drilling activity and/or improving margins. Stock is trading at half its historic multiple despite strong industry fundamentals, margins that have increased 50 per cent since 2021, a five per cent yield and a net cash position. Near-term activity increases from NE B.C. due to First Nations resolution and longer-term, think of services needed once LNG Canada is running in 2025/26. Downside protection from having no debt.
Past Picks: July 14, 2022
Arc Resources (ARX TSX)
- Then: $14.46
- Now: $16.47
- Return: 14%
- Total Return: 17%
Whitecap Resources (WCP TSX)