Jan 24, 2019

Josef Schachter's Top Picks: Jan. 24, 2019

BNN Bloomberg

Josef Schachter , BNN Bloomberg

Josef Schachter, president of Schachter Energy Research Services
Focus: Energy and energy service stocks

MARKET OUTLOOK

I'm now in the bull camp for energy, believing that the bottom for crude and the energy stocks was on Dec.24. The recent bounce in the general U.S. and Canadian major market averages appears to be a classic bear market rally, which will end very shortly. I expect a test of the lows for the key averages over the next two months and maybe some new lows for some like the Dow Jones Industrials Index. It would not surprise me if the FAANGs got more defanged and lead the markets lower. Fundamental reasons for more downside would be problems with Q4/18 earnings or company outlooks, the trade dispute not making progress on intellectual property, the Mueller investigation outcome being problematic for Trump, the ongoing closure of the U.S. government getting testier or Democrat policies getting more worrisome for business.

Downside for the Dow Jones Industrials could be to the 20,000 area, the S&P/TSX Energy Index could be back to the 130 area and WTI could retreat to between US$42 to US$45 levels. This would create another table-pounding buying opportunity.

We expect to see WTI prices reaching over US$70 per barrel in Q4/19 and for the S&P/TSX Energy Index to reach the 200 level. AECO should be able to hit the $3 per thousand cubic feet level in late 2019. This year will be a very rewarding one for energy investors after the recent pain.

TOP PICKS

BELLATRIX (BXE.TO)

Bellatrix announced that they drilled five gross wells in Q4/18, made some small acquisitions and that field production had risen to 35,100 barrels of oil equivalent per day (73 per cent natural gas). This was up from 33,530 boe/d in Q3/18 and is above our forecast of 34,420 boe/d for Q4/18. The stock is very cheap, trading at less than one times 2018 cash flow per share (CFPS). The company is planning a conservative budget for 2019, with capital expenditure of $40 to $50 million and a targeted production range of 34,000 to 36,000 boe/d. We’re more optimistic and see them spending $52 million in 2019 (the difference spent in the second half that year) and generating CFPS of $0.64. We continue to add to this position on weakness.

SDX ENERGY (SDX.V)

SDX’s CEO gave an update on the company on Jan. 14 which was very encouraging. They received the go-ahead from the Egyptian government to build the pipeline and central facility to bring on the South Disouq natural gas discovery. Plateau gross production should be between 50 to 60 million cubic feet per day (55 per cent SDX) and should start up in late Q2/19. The South Ramadan offshore well (12.75 per cent SDX) came in with a surprise result of 110 feet of net oil pay from three zones. Testing will commence on the main Matulla zone (75 feet of net pay) and it will be determined if the well will flow at a commercial rate. We continue to buy shares of SDX on weakness.

SURGE ENERGY (SGY.TO)

Surge announced on Jan. 11 a reduced spend to $135 million from $160 million due to the current lower commodity prices. They forecast average production of 22,000 boe/d in 2019 and an exit rate of 23,000 boe/d. They’re using US$52 per barrel for their commodity forecast. We see their dividend of 10 cent annually or $0.8333 cents per share monthly as sustainable. With our more optimistic outlook for WTI, we see cash flow at $250 million and CFPS at $0.81 in 2019. Our volume forecast is for average production of 24,075 boe/d (85 per cent liquids) with an exit quarter of 25,000 boe/d. We continue to buy shares of Surge on weakness. We believe that they may consider raising their dividend once again in late 2019. The current yield is 7.4 per cent.