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

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MARKET OUTLOOK

I remain cautious on the energy market for the near term as it’s likely a general stock market correction is underway. The momentum and FAANG stocks are now showing deterioration after leading the stock market for years. The Trump trade war is escalating, which will be the issue that moves investors from bullish to bearish. We expect crude oil to fall below US$70 per barrel shortly. If the trade battle and stock market decline are significant (a 15 to 20 per cent plunge), crude prices could fall below US$60 for WTI in the coming months. Downside for the S&P/TSX Energy Index is below 160 points (it’s now around 210). Hold cash for a great buying opportunity in Q4/18 – maybe late October.

TOP PICKS

SDX ENERGY (SDX.V)

SDX Energy is getting ready to bring on natural gas volumes in Morocco and Egypt in the next two to three quarters, which will double production levels into year-end 2018. Earnings before interest taxes depreciation and amortization (EBITDA) rose sharply in Q1/18 to US$7.4 million from US$1.6 million in Q1/17. Volumes in Q1/18 were 3,036 boe/d and should rise to over 7,500 boe/d in Q4/18 and an exit number that could reach over 7,500 boe/d. SDX has no debt and cash at the end of Q1 was US$29.3 million. Removing cash, SDX trades at only 3.5 times – 2018 cash flow. This is a very cheap stock. The stock is on our Action Alert BUY list and we’re investors in this company. We have a one-year target of $2 per share for SDX upon reasonable upcoming drilling success and meeting their exit volume target. Our bull market target is $5 per share.

We recommended the stock in 2016 when it was at $0.30 per share, again in 2017 when it was at $0.80 and now at $1.09. The reason for the repeat recommendation is that production has gone from 1,200 boe/d in early 2016 to 3,036 boe/d in Q1/18 and to an expected exit rate this year of  over 7,500 boe/d. Their success with the drill bit is the reason for the volume gains. We recently added to our position in SDX. 

BONAVISTA ENERGY (BNP.TO)

Bonavista  reported production of 72,417 boe/d in Q1/18 (75 per cent natural gas), up 38 per cent from 70,281 boe/d in Q1/17. They plan to use excess funds (potentially 40 per cent of cash flow) to pay down debt, which was $802 million at the end of Q1/18, compared to equity of $1.54 billion. Book value at the end of Q1/18 was $5.99 per share and our conservative net asset value (NAV) was $4.73 per share at year end 2017. Our cash flow estimate for 2018 is $0.97 per share.

This is a very cheap stock. Note also that the stock rose from $0.90 per share in Q1/16 to $5.44 per share that same year. Note also, that at the peak of the last bull market in 2014, BNP traded at $14.98 per share. Our one-year target is $7 per share. We recently added to our position.

CREW ENERGY (CR.TO)

Crew Energy reported production of 25,939 boe/d (76 per cent natural gas) in Q1/18 up 12 per cent from the 23,231 boe/d in Q1/17. For 2018, we see production rising modestly as they run the business conservatively in the current tough environment. Book value was $5.87 per share at the end of Q1/18 and our conservative NAV is $7.64 per share at year end 2017. Our cash flow estimate per share for 2018 in 2017 is $0.76 per share, so the stock is trading at a very cheap 2.7 times cash flow.  We own the stock and have added more shares recently. Our one-year target is $7 per share. While this may seem unbelievable, the stock rose from $2.38 in Q1/09 to $21.56 per share within two years.  

PAST PICKS: NOV. 9, 2017

SDX ENERGY (SDX.V)   

• Then: $0.92
• Now: $1.05
• Return: 14%
• Total return: 14%

BELLATRIX EXPLORATION (BXE.TO)

Bellatrix exceeded our forecast for cash flow in Q1/18 as it realized a hedge gain of seven cents on the quarter. Cash flow came in at 30 cents versus 17 cents last year and our forecast of 24 cents. Production rose 6 per cent to 36,740 barrels of oil equivalent per day (boe/d) in Q1/18, but is forecast by the company to average 34,000 to 35,500 boe/d, as they drill less wells throughout the year. The stock is trading significantly below book value of $13.47 per share and NAV of $13.68 per share. This is a very cheap stock and is on our Action Alert BUY list. We’re also investors in the stock. Buy on weakness. Our bull market target into 2023 is $20. We’ve recently added to our position in the stock.

• Then: $3.25
• Now: $1.27
• Return: -61%
• Total return: -61%

TRINIDAD DRILLING (TDG.TO)

Trinidad’s Q1/18 results showed nice improvement in the U.S., but weakness in Canada. Funds flow came in as expected at $22.2 million or eight cents per share. The U.S. is doing much better and they will add rigs to their Permian fleet. This is the key growth area for the company for the next year or so. Trinidad is very cheap (book value $4.61 per share) and the company has started a sale process to maximize shareholder value. They sold three rigs in their joint-venture in Saudi for excellent prices and will use the proceeds to fund the U.S. expansion. Buy on weakness. Our bull market target is $14 per share in 2023 if it hasn’t been taken over before then. We hope to be a buyer of this stock if the upcoming weakness in the sector does occur.  

• Then: $1.66
• Now: $1.76
• Return: 6%
• Total return: 6%

Total return average: -14%