Josef Schachter, president of Schachter Energy Research Services Inc.
Focus: Energy and energy service stocks
MARKET OUTLOOK
The last few times I have been on BNN Bloomberg I stated that I had switched from being a bear to a bull on the energy sector. Our checklist items to turn bullish on both oil and natural gas have all occurred. For oil: OPEC is making significant cutbacks, U.S. production has stalled, Iran sanctions will return this spring and the tragic Venezuela problem continues. While we see lower prices for oil once winter ends and inventories start rebuilding again, our outlook gets more positive from summer on when this strong demand season starts. We look for less than US$50 per barrel in Q2/19 and then a recovery into Q4/19 to over US$70 per barrel. For natural gas very cold weather in North America and five year lows for natural gas storage have lifted the prices. Longer-term, more LNG exports from the U.S. Gulf Coast and more closure of coal fired electric generating facilities will increase domestic demand as well. AECO spot is nearing $4.00 per thousand cubic feet (mcf) – a great price for the industry if it is sustained for some time.
We see a new energy bull market has started and it could last five plus years. Natural gas will be the better performing commodity at first.
TOP PICKS
BONAVISTA ENERGY (BNP.TO)
Last purchased at $1.18.
BNP produced 68,011 barrels of oil equivalent per day (boe/d) in Q4/18, slightly below our forecast as they faced unscheduled down time and shut in some uneconomic natural gas production. Cash flow for the year slightly exceeded our forecast at $291 million for the year ($1.13 per share versus our forecast of $1.10 per share) and they produced $77.6 million during Q4/18. BNP used 20 per cent of annual cash flow or $60 million in 2018 to pay down debt. In 2019, we see them paying down around $80 million of debt. The stock trades materially below Q4/18 book value of $5.97 and our conservative flat pricing net asset value (NAV) of $4.64 per share. One year target $3.50 per share.
CANACOL ENERGY (CNE.TO)
Last purchased at $4.31.
Canacol is a natural gas producer in Colombia that gets a fabulous US$4.75 per mcf at the wellhead. Production is being ramped up from 130 million cubic feet per day (mmcf/d) to 215 mmcf/d this June or July. Production in Q3/18 was 21,978 boe/d and this should grow into year-end 2019 to over 34,000 boe/d. Further growth can come from ongoing development drilling and from high impact exploration activity. One year target $8.00 per share.
SURGE ENERGY (SGY.TO)
Last purchased at $1.39.
Surge reported Q3/18 production of 18,029 boe/d (85 per cent liquids) and will be seeing even more growth as they integrate a new acquisition which should have brought exit 2018 production to over 22,000 boe/d. Book value is $3.06 per share and cash flow in 2018 should be $0.65 per share and $0.75 per share in 2019. Surge pays a very healthy dividend of $0.10 per share annually, paid monthly. This provides a yield of seven per cent. We have a one year stock price target $3.70 per share.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BNP | Y | Y | N |
| CNE | Y | Y | N |
| SGY | Y | Y | N |
PAST PICKS: FEB. 12, 2018
BIRCHCLIFF ENERGY (BIR.TO)
- Then: $3.30
- Now: $3.68
- Return: 12%
- Total return: 15%
SDX ENERGY (SDX.V)
- Then: $0.96
- Now: $0.61
- Return: -36%
- Total return: -36%
BELLATRIX EXPLORATION (BXE.TO)
- Then: $1.49
- Now: $0.64
- Return: -57%
- Total return: -57%
Total return average: -26%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BIR | Y | Y | N |
| SDX | Y | Y | N |
| BXE | Y | Y | N |
WEBSITE: schachterenergyreport.ca
TWITTER: @josefschachter
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