Apr 18, 2019

Josef Schachter's Top Picks: April 18, 2019

BNN Bloomberg

Josef Schachter , BNN Bloomberg

Josef Schachter, president of Schachter Energy Research Services Inc.
Focus: Energy and energy service stocks

MARKET OUTLOOK

Over the last six months, I’ve said on BNN Bloomberg that I’m now a bull on the energy sector. All of the items in our checklist to turn bullish on oil and natural gas have occurred. or oil, OPEC is making significant cutbacks, U.S. production has stalled, Iran sanctions will return this spring and the tragic Venezuela problem continues. While we see near-term lower prices for oil as inventories build this spring, our outlook gets more positive after the summer driving season begins. We look for US$55 per barrel in the second quarter and then a recovery into the fourth quarter to over US$70 per barrel.

As for natural gas, this past winter’s cold weather in North America along with the storage at five-year lows set the stage for higher prices this summer and winter. Longer term, rising LNG exports from the U.S. Gulf Coast and further closures of coal-fired electric generating facilities in North America will increase demand.

We think a new energy bull market has started and it could last for over five years. Use any market dips this spring to add to positions. From the fourth-quarter low, the S&P/TSX Energy Index has risen from 127 to 164 points or 29 per cent and some stocks like Birchcliff, Crescent Point, Questerre, Tamarack and Whitecap have risen more than 50 per cent

TOP PICKS

BONAVISTA ENERGY (BNP.TO)

Bonavista has a $300-million market cap and had production of 69,154 barrels of oil equivalent per day (boe/d) in 2018. We’re forecasting 69,200 boe/d in 2019 (70 per cent natural gas). Production may decline in the first half of 2019 and start to grow again in the second half if our price deck is correct.

Bonavista plans on using any excess funds to pay down debt. They paid down $60 million of debt in 2018 and are estimating paying down up to $40 million in 2019. With our higher price deck, we see them paying down up to $70 million this year. Bonavista’s book value is $5.97 per share. Our one-year target is $3.50 per share. We plan to continue to add to this position on weakness.

GRAN TIERRA (GTE.TO)

Gran Tierra is a $1.3-billion-market-cap oil company focused in Colombia with production in the fourth quarter of 38,156 barrels per day (100 per cent oil). Cash flow in 2018 came in at US$0.80 per share or US$306million. The company is growing via development of new zones found in producing fields and via the drilling of high-impact exploration wells. Our forecast is for production to average 41,250 barrels per day in 2019 and for cash flow to be at US$342 million. Gran Tierra reports in U.S. funds and we look for them to have cash flow per share of more than US$0.85 in 2019.

Given the political and egress challenges in Canada, this company gives investors good diversification and access to the higher prices in U.S. dollars and international pricing. Our one-year target is C$5.50. Buy on any upcoming weakness.

INPLAY OIL (IPO.TO)

This small-cap company ($76 million market cap) reported production of 4,653 boe/d in 2018 (70 per cent liquids). Its core area is the Cardium, with a growing land position in the emerging Duvernay oil hot play area. Book value is $2.69 per share and our one-year target is $2.50 per share. Cash flow per share this year is estimated at $0.48 per share and we forecast production averaging 5,100 boe/d, with a Q4/19 production level of 5,400 boe/d. Compared to most other Canadian energy companies, this one has the highest volume growth projection in 2019.