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’s likely a general stock market correction is underway. The momentum and the FAANG stocks are now showing deterioration after leading the stock market for years. The Trump trade war is escalating and this will be the issue that moves investors from bullish to bearish. The China Shenzhen index is now down over 20 per cent, showing how trade wars can have a negative impact.

We expect crude oil to fall below US$60 in the next few months if the trade battle and stock market decline is significant (15 to 20 per cent). Downside for the S&P/TSX Energy Index is below 160 points (now 201 versus 210 when I was on in July).

Hold cash for a great buying opportunity in Q4/18 – maybe late October.

TOP PICKS

SDX ENERGY (SDX.V)

SDX is getting ready to bring on natural gas volumes in Morocco and Egypt in the next two quarter, which will double production levels into year-end 2018. EBITDA rose sharply in Q1/18 to US$7.4 million from US$1.6 million in the same quarter last year. Volumes in Q1/18 were 3,036 barrels of oil equivalent per day (boe/d) and should rise to over 7,500 boe/d in Q4/18 and an exit number that could reach more than 8,000 boe/d.

SDX has no debt and cash at the end of Q1 was US$29.3 million. Removing cash, SDX trades at only 3.5 times 2018 cash flow. This is a very cheap stock. It’s on our Action Alert BUY list and we’re investors in this company. We have a one-year target of $2 per share for SDX upon reasonable upcoming drilling success and meeting their exit volume target. Our bull market target is $5 per share. We recommended the stock in 2016 when it was at $0.30 per share, again in 2017 when it was at $0.80 and now at $1.09. The reason for the repeat recommendation is that production has gone from 1,200 boe/d in early 2016 to 3,036 boe/d in Q1/18 and to an expected exit rate this year of over 7,500 boe/d. Their success with the drill bit is the reason for the volume gains. We recently added to our position in SDX.

TRINIDAD DRILLING (TDG.TO)

Trinidad’s Q2/18 results showed wonderful improvement in the U.S. and more importantly in Canada. Funds flow for Q2/18 came in as expected at $30.8 million or 11 cents per share versus $10.5 million or four cents per share in Q2/17. Operating margin in Canada improved in Q2/18 from $3,557 per day last year to $7,331 this year. In the U.S., operating margin rose from US$4,901 to US$6,472 per day. The U.S. is doing much better and they will add rigs to their Permian fleet. Utilization in the U.S. rose to 63 per cent from 48 per cent last year. This is the key growth area for the company for the next year or so. Trinidad is very cheap (book value $4.63 per share on June 30). Our bull market target is $7 per share in 2023, if it hasn’t been taken over before then. We recently started buying this stock as it fell due to the end of a sale process.

CASH

Hold some cash for a great buying opportunity when stocks retreat as crude oil falls below US$60.

PAST PICKS: SEP. 18, 2017

ESSENTIAL ENERGY (ESN.TO) 

• Then: $0.59
• Now: $0.53
• Return: -11%
• Total return: -11%

GRAN TIERRA ENERGY (GTE.TO)  

• Then: $2.63
• Now: $4.35
• Return: 65%      
• Total return: 65%

CASH

Total return average: 27%

TWITTER: @josefschachter
WEBSITE: www.schachterenergyreport.ca