Josef Schachter, president of Schachter Energy Research Services

Focus: Oil and gas stocks
_______________________________________________________________

MARKET OUTLOOK
Energy prices have been very volatile over the last two years and this may remain the case for the rest of 2017. Between OPEC’s desire for more market share and higher prices, the U.S. increasing production by 9.1 mb/d this month, Iran and Iraq raising production later this year, and Libya and Nigeria adding production while not being a part of the OPEC quota, a glut may arise during the spring shoulder season which we have now entered. We see crude having downside risk to the low US$30s over the next few months due to these issues. Additional downside could occur this summer if demand is lower than normal — recent U.S. auto sales have been very disappointing. If we see any market correction and liquidity becoming constrained, unprecedented long speculative holding in crude oil may be aggressively sold and in that case, a test of the February lows of US$26 might occur. We recommend investors lower their exposure and hold significant cash for a shakeout buying opportunity later this year.

We look for oil prices to improve in Q1/18 and we may see a rise above this year’s high of US$55/bbl if inventories start to decrease. If that occurs, supply and demand will move back into balance and the large inventory overhang will start to shrink.

TOP PICKS

PENGROWTH ENERGY CORP. (PGF.TO) – Market capitalization $738 million, $1.35/share (April 4)
Pengrowth is a thermal oil producer at Lindbergh and has conventional production in the Montney, Cardium and Swan Hills areas. In Q1/17, production is estimated at 47,000 boe/d after recent asset sales. PGF has been focused over the last year in paying down debt and has done an admirable job cutting debt from nearly $2 billion to $1.1 billion in recent disclosures. Additional announced asset sales of more than $270 million will further lower this. We expect them to make additional asset sales in coming quarters to fully remove this issue from concern. Growth will come from additional well pares at Lindbergh in Q4/17, which could add up to 4,000 boe/d of additional thermal production (to 19,000 boe/d) and bring total production levels to 48,000 boe/d. As phase two of Lindbergh unfolds, thermal production will rise to 37,000 boe/d in 2020, providing strong growth. Once phase two is on stream, a dividend may be re-instated. Our 12-month stock price target is $3.60/share. The stock is cheap, trading at a discount from Q4/16 book value of $2.71/share and our conservative NAV of $2.75/share at year-end 2016. Seymour Schulich is the largest shareholder with ownership of 109 million shares, or 20 per cent of the company.

INPLAY OIL (IPO.TO) – Market capitalization $120 million, $1.94/share (April 4)
IPO is a Cardium producer with production in Q1/17 of more than 3,600 boe/d (66 per cent liquids). The stock is cheap on a valuation basis — book value is $3.00/share Q4/16 and below conservative 2016 NAV of $2.14/share. IPO is led by the team that was previously at Vero Energy (sold out to Torc in late 2012). The CEO is Doug Bartole. Our production forecast for 2017 is 4,110 boe/d and our CFPS estimate for the year is $0.45/share. Our 12-month price target is $3.60/share.         

SDX ENERGY (SDX.V) – Market capitalization $150 million+, $0.82/share (April 4)
SDX is focused on production assets in Egypt and Morocco and has significant development and exploration activity planned in 2017 to increase shareholder value. Production in early 2017 yielded more than 4,200 boe/d and with development activity at Meseda (oil) in Egypt and two areas in Morocco (natural gas), SDX should be able to raise production into the end of 2017 to nearly 7,000 boe/d. Prices for natural gas in Morocco are US$9/mcf or over 4x Canadian natural gas prices. SDX also is involved in a high-impact exploration well (now spudded) which will reach target next month. The targets are 400 bcf of gas and up to 100 mb of recoverable oil. While risky, there is no value for this in the current share price and if successful could add $1.00/share to our current price target. Our 12-month price target is $1.20/share based upon a very conservative 3x CFPS of Q4/17 annualized of US$0.32/share, or more than $0.40/share from just the development activity upside. The company has no debt and has over US$18 million in cash.