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

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MARKET OUTLOOK

I remain cautious on the energy market for the near term as it appears that a general market correction of 20 per cent or more is now underway, with the downside only half fulfilled. The momentum and expensive FANG stocks are leading the way down (some plunging sharply in recent weeks), but it’s clear that rising interest rates (the LIBOR went up 100 basis points in the last few months), a more hawkish Federal Reserve and a lowering of the monetary heroin (Fed balance sheet) are all pressuring the stock markets.

We’re bullish on natural gas and natural gas stocks and our top picks will show this emphasis. On oil, we see much lower prices during Q2/18, as U.S. production rises over 10.5 million barrels per day (10.43 million last week) and could reach 11 million bpd during the second half of 2018. With winter over, crude inventories will rebuild worldwide as demand falls by 2.5 to 3 million bpd from winter peak demand to the slower usage season, before rising again in the summer. Crude should fall below US$50 per barrel in the coming months. Hold cash for great buying opportunity once this corrective phase is over.

TOP PICKS

BELLATRIX EXPLORATION (BXE.TO)

Bellatrix Exploration reported production of 37,077 barrels of oil equivalent per day (boe/d) (74 per cent natural gas) in Q4/17, up 16 per cent from the 31,888 boe/d in Q4/16. For 2018, we see production rising to 38,000 boe/d into year-end as they run the business conservatively in the current tough environment. Book value is $15.67 per share at year-end and our conservative net asset value (NAV) is $13.68 per share at year-end 2017. Note that cash flow per share in 2017 was $1.12 per share, just below the current stock price.

The stock was added to our Action Alert BUY list at $1.87 per share on Dec. 13 and we purchased our first shares on Jan. 5 at $2.10. We have added more shares personally as the stock has been hit. Our one-year target is $7.00 per share. While this may seem crazy, the stock rose from $2.40 in Q1/09 to $23 per share one year later. That is the power of a new bull market and we see one starting for energy in the second half of the year, which could last into 2022-2023.

BONAVISTA ENERGY (BNP.TO)

Bonavista reported production of 74,799 boe/d in Q4/17 (71 per cent natural gas), up 8 per cent from 69,399 boe/d in Q4/16. In 2018 they will only grow moderately to 75,750 boe/d and use excess funds (potentially 40 per cent of cash flow) to pay down debt, which was $800 million at year-end compared to equity of $1.54 billion. Book value was $6.01 per share and our conservative NAV was $4.73 per share at year end-2017. Cash flow per share in 2017 was $1.18 per share, more than the current stock price.

This is a very cheap stock. Note that Bonavista rose from $0.90 per share in Q1/16 to $5.44 per share that same year. Note also that at the peak of the last bull market in 2014, it traded at $14.98 per share.

We added Bonavista to our Action Alert BUY list on Dec. 15 at $1.78 per share and we personally purchased our initial position on Jan. 5 at $1.89 per share. We have added more shares to our holdings as the stock has been hit. Our one-year target is $7.00 per share.

CREW ENERGY (CR.TO)

Crew Energy reported production of 25,270 boe/d (74 per cent natural gas) in Q4/17, up 13 per cent from the 22,380 boe/d in Q4/16. For 2018 we see production staying flat as they run the business conservatively in the current tough environment. Book value was $5.83 per share at year-end and our conservative NAV is $7.64 per share at year end 2017. Cash flow per share in 2017 was $0.73 per share so the stock is trading at a very cheap 2.6 times cash flow. The stock was added to our Action Alert BUY list at $3.41 per share on Dec. 13, and we purchased our first shares on Jan.5  at $2.88 per share, adding more shares personally as the stock has been hit. Our one-year target is $7.00 per share. While this may seem crazy, the stock rose from $2.38 in Q1/09 to $21.56 per share within two years.

PAST PICKS: JUNE 12, 2017

BIRCHCLIFF ENERGY (BIR.TO)

We added Birchcliff to our Action Alert BUY list on Dec. 15 at $3.91 per share. We bought our first position in the stock at $3.94 per share on Jan. 5 and have used weakness to add to it. We like the stock a lot and have a one-year target of $9 per share. Book value at year-end was $6.30 per share and it pays a 10 cent dividend for a nearly 3 per cent yield. Birchcliff traded at $14.58 in 2014, the peak of the last energy bull market.

• Then: $5.97
• Now: $3.87
• Return: -35.17%
• Total return: -33.70%

SURGE ENERGY (SGY.TO)

We added Surge Energy to our Action Alert BUY list on Dec. 13 at $1.91 per share. We do not yet personally own the stock. It’s oil-focused and may see some more downside if we’re right about lower crude prices in the coming months. Surge has a dividend of $0.095, providing a current yield of 4.9 per cent. Under $1.80, the stock would be a wonderful purchase. We have a one-year target of $3.70 per share. Surge traded at over $7 per share in 2014.

• Then: $2.24
• Now: $1.94
• Return: -13.39%
• Total return: -9.98%

WESTERN ENERGY SERVICES (WRG.TO)

We added the stock to our Action Alert BUY list on Dec. 22 at $1.16 per share. The company exceeded our Q4/17 forecast. The stock is very cheap, trading below 2017 year-end book value of $4.19 per share. We have a $2.50 per share one-year target. Buy on upcoming market weakness. Western Energy Services traded over $11 in 2014.

• Then: $2.03
• Now: $1.04
• Return: -48.76%
• Total return: -48.76%

Total return average: -30.81%

TWITTER: @josefschachter
WEBSITE: www.schachterenergyreport.ca