Dec 17, 2018

Josef Schachter's Top Picks: Dec. 17, 2018

BNN Bloomberg

Josef Schachter , BNN Bloomberg

Josef Schachter, president of Schachter Energy Research Services Inc.

Focus: Energy and energy service stocks

MARKET OUTLOOK

When I was last on I had switched from being a bear to a bull and showed off our SER energy bull mascot. At that time, our three checklist items to turn bullish on both oil and natural gas had all occurred. Those three conditions were: we wanted to see WTI below US$60 a barrel (low US$49.41 a barrel on November 28), the S&P/TSX energy index below 160 (it was 144 on December 10), and lastly the S&P Energy Sector Bullish Percentage Index to fall below 10 per cent (it fell to 3.45 per cent on November 27). We previously mentioned that investors should take advantage of the tax loss selling season in the first and second week of December to get appropriately invested. The energy bargains are there now!

The cathartic tax loss liquidation was the final phase of this bear market. A new energy bull market which could last five plus years should start early in the new year. Natural gas will become the best performing commodity and this is clearly being seen by the sharp rise the NYMEX natural gas, as low inventories and colder winter weather affect demand.

TOP PICKS

SURGE ENERGY (SGY.TO)

Stock last bought at $1.48.

Surge reported Q3/18 production of 18,029 barrels of oil equivalent per day (boe/d) at 85 per cent liquids and will be seeing even more growth as they integrate a new acquisition which will bring exit 2018 production over 23,000 boe/d. Book value is $3.06 per share, cash flow in 2018 should be $0.65 per share and $0.81 per share in 2019. Surge pays a very healthy dividend of $0.10 per share annually and it is paid per month which provides a yield of 6.8 per cent. We have a one year stock price target $3.70 per share. The stock is a great total return story.

VERMILION ENERGY (VET.TO)

Stock last bought at $30.37.

Vermilion reported Q3/18 production of 96,222 boe/d (56 per cent liquids) exceeding our forecast of 95,000 boe/d. In 2019 they should exceed 100,000 boe/d. They have high netback production with free cash flow in Europe and a growing stable business in Canada. Vermilion has a dividend of $0.23 per month or $2.76 annually for a current yield of 9.1 per cent. The company should have cash flow over $6.00 per share in 2018 and over $6.74 per share in 2019. Vermilion has never lowered their dividend. We have a $50 one year target so the total return is excellent for conservative income investors.

WHITECAP RESOURCES (WCP.TO)

Stock last bought at $4.48.

Whitecap’s production rose by 30 per cent in Q3/18 with 75,529 boe/d (85 per cent liquids) as the quarter included the Weyburn acquisition. Cash flow came in at $205M or $0.49 per share and exceeded our $0.45 forecast. For 2018 we see cash flow at $1.86 per share and $2.04 for cash flow per share (CFPS) in 2019. Book value at the end of Q3/18 was $7.89 per share. Whitecap pays a $0.08 dividend per quarter or a 7.1 per cent annually, and it is a secure dividend. We have a 12-month target of $12.00 per share.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
SGY	Y	Y	N
VET	Y	Y	N
WCP	Y	Y	N

PAST PICKS: DEC. 18, 2017

We like and own all of these depressed natural gas focused stocks. During the tax loss selling season we added to all of these names. We expect natural gas prices to start taking off in the U.S. as storage withdrawals indicate a shortage of U.S. natural gas. Then, Canadian gas will be sucked down into the U.S. at higher prices versus the very depressed Alberta Energy Company (AECO) spot market of less than $1.50 per million cubic feet (mcf). U.S. natural gas prices are now at US$4.25/mcf so if they rise over US$6/mcf this winter then AECO could get pulled up over C$3.00/mcf. This kind of price rise would wake these stocks up!

BELLATRIX EXPLORATION (BXE.TO)