Aug 26, 2019

Josef Schachter's Top Picks: Aug. 26, 2019

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Full episode: Market Call for Monday, August 26, 2019

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Josef Schachter, president, Schachter Energy Research Services Inc.

Focus: Energy and energy-service stocks

MARKET OUTLOOK

I have commented regularly on Market Call that I am a bull on the energy sector and investors should buy during market dips. On WTI crude oil: OPEC is making and holding significant cutbacks, Iran sanctions have returned, companies are more focused on financial return and balance sheets, and Alberta is continuing with crude oil apportionment into the end of 2020. While we see a breach of US$50 per barrel in the short term, we’re looking for a recovery in winter 2019-20 to over US$70 per barrel from a low of US$46-48 per barrel over the next month or so. Our view is that a new energy bull market started in February 2016 when WTI was US$26 per barrel, which could last five to seven years, and in the outlier years we should see more than US$100 per barrel for WTI on a sustainable basis. Use market dips to add to positions. For the S&P/TSX Energy Index (now 122 points), we see a pullback to less than the 110 level, which should provide the next great entry point. In the near term, we see overall market weakness as the continued trade war pressures the general stock market. A 10-to-20-per-cent stock market correction in the Dow Jones and the TSX is possible into late October 2019.

TOP PICKS

Josef Schachter's Top Picks

Josef Schachter of Schachter Energy Research shares his top picks: Birchcliff Energy, Surge Energy and Vermilion Energy.

Birchcliff Energy (BIR:CT) – Last purchased at $1.94
Birchcliff had production of 78,453 boe/d (78 per cent natural gas) in Q2/19. CFPS came in at 28 cents per share or $74 million. The good cash flow results were due to higher liquids production (22 per cent) and lower overall costs. For 2019 we see CFPS of $1.26. BIR has a dividend of $0.105 paid quarterly. The company is one of our favourite natural gas stocks for the new energy bull market. It may benefit from the big potential of LNG exports on the West Coast and is very cheap at current prices (book value at $6.66 per share). We have a one-year target of $5.00 per share. We are investors in the stock and plan to add to our holdings when we see the next low risk buy signal from the S&P Energy Bullish Percent Index.

Surge Energy (SGY:CT) – Last purchased at $1.08
Surge reported Q2/19 production of 21,544 boe/d (84 per cent liquids) from four core areas. Book value on June 30 was $2.61 per share. SGY pays a very healthy dividend of $0.10 per share annually, paid monthly. This provides a yield of 9.3 per cent. We have a one-year stock price target $2.40 per share. Insiders are significant shareholders. The CEO owns 5.4 million shares. BUY! Surge has a market cap of $350 million. It is seeing excellent drilling results in its Eyehill and Betty Lake core areas. In 2018 when WTI was over US$75 per barrel, SGY traded at a high of $2.61 per share. We see crude in 2020 reaching this level again. We are investors in the stock and plan to add to our holdings when we see the next low-risk buy signal from the S&P Energy Bullish Percent Index.

Vermilion Energy (VET:CT) – Last purchased at $18.87
Vermilion reported Q2/19 production of 103,003 boe/d (55 per cent liquids). In 2019 it should exceed 105,000 boe/d by year end. It has high netback production with free cash flow in Europe and a growing stable business in Canada. VET has a dividend of $0.23 per month or $2.76 annually for a current yield of 14.6 per cent. Vermilion should have cash flow of over $6.90 per share in 2019. While some investors are concerned about Vermilion cutting its dividend, we do not concur with this fear. VET has never lowered its dividend throughout its history, even when we had US$26 per barrel for WTI in February 2016. We have a $36 one-year target, so the total return is excellent for conservative income investors. We are investors in the stock and added to our holdings last week at $19.20 per share.