Full episode: Market Call for Friday, January 24, 2020
Josef Schachter, president of Schachter Energy Research Services Inc.
Focus: Energy and energy service stocks
I am a bull on the energy sector. Investors should plan on being buyers during market dips. While we see lower prices for crude in the next month or so down to US$54, we look for a recovery into the second half of 2020 to over US$70. Our view is that a new energy bull market started in February 2016 when WTI was down at US$26 and that this could last five to seven year. In the outlier years we should see WTI at over US$100 on a sustainable basis. Use market dips to add to positions.
For the S&P/TSX Energy Index, we see a pullback to under 125 basis points over the next month or so which should provide the next great entry point. Our target for the Energy Index in the second half of the year is 200. There are lots of great stocks to buy which have significant growth prospects and in many cases provide attractive dividends in the meantime.
SURGE ENERGY (SGY TSX)
Surge reported Q3/19 production of 21,217 barrels of oil equivalent per day (85 per cent liquids) from four core areas. Book value on Sep. 30 was $2.53 per share. Surge pays a very healthy dividend of $0.10 per share annually, paid monthly. This provides a very healthy yield of 9.3 per cent. We have a one-year stock price target $2.40 per share.
Insiders are significant Surge shareholders. The CEO owns 6.1 million shares and has been adding to his position on a regular basis. Surge has a market cap of $350 million (debt of $376 million and equity book value of $819 million). In 2018 when WTI was over US$75, Surge traded at a high of $2.61 per share. We see crude in the latter half of 2020 reaching over US$70, so the $2.40 one-year target is achievable. It is likely in 2021 if we see consistent prices over US$75 that Surge could get board approval to increase the dividend once again. A $0.12 per share dividend (a penny a month) is our expectation.
In 2020, we see Surge producing 22,000 boe/d and generating cash flow of $190 million or $0.58 per share. Capital expenditure is forecast at $110 million based upon our price deck forecast with the excess used for the dividend and debt repayment. The dividend payout ratio is a low 17 per cent. We are investors in the stock and plan to add to our holdings when we see the next low-risk energy market “buy” signal.
BIRCHCLIFF ENERGY (BIR TSX)
Birchcliff had production of 80,548 boe/d (77 per cent natural gas) in Q3/19. Cash flow per share came in the quarter at 24 cents per share or $63 million. The good cash flow results were due to higher liquids production (18 per cent) and lower overall costs. For 2020 we see cash flow per share of $1.54. Birchcliff has a dividend of $0.105 paid quarterly dividend for a 5 per cent yield. The company is one of our favourite natural gas stocks for the new energy bull market and the big potential of LNG exports on the west coast. It’s also very cheap at the current price. We have a one-year target of $5 per share. Insiders have been buyers of the stock in recent months. We are investors in the stock and plan to add to our holdings when we see the next low-risk energy market “buy” signal.
GRAN TIERRA ENERGY (GTE TSX)
Gran Tierra’s production in Q4/19 is estimated to have grown to 35,000 barrels per day, up from 32,918 in Q3/19. Our forecast for 2020 is for production of 37,000 b/d in their operating company in Colombia. Cash flow in 2020 is forecast at US$330 million or US$0.90 per share and capex at US$220 million. They will have funds to pay down debt and make meaningful purchases of stock under their normal course issuer bid. Capex in 2020 is to be spent on drilling 16 to 19 development wells and three to five exploration wells. Gran Tierra picked up two more blocks in the Putumayo basin in the recent bid round in the country. Book value is US$2.74 per share at the end of Q3/19. We plan to become shareholders when we see the next low-risk energy market “buy” signal. Insiders have been large buyers of the stock in recent months.
PAST PICKS: FEB. 28, 2019
CANACOL ENERGY (CNE TSX)
- Then: $4.46
- Now: $4.30
- Return: -4%
- Total return: -2%
BONAVISTA ENERGY (BNP TSX)
- Then: $1.25
- Now: $0.52
- Return: -58%
- Total return: -58%
SURGE ENERGY (SGY TSX)
- Then: $1.44
- Now: $1.04
- Return: -28%
- Total return: -23%
Total return average: -28%