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

MARKET OUTLOOK

I have said on Market Call before I am now a bull on the energy sector. Our checklist items to turn bullish on both oil and natural gas have occurred. For oil: OPEC is making and holding significant cutbacks, Iran sanctions have returned, shipping attacks show the vulnerability of the Middle East crude oil shipping lanes and Venezuelan and Libyan production problems continue. While we see a breach of US$50 per barrel in the short-term (now at US$56), we look for a recovery into next winter to over US$70 from a low of US$46 to US$48 over the next month or so.

Our view is that a new energy bull market started in February 2016, when WTI was at US$26. The new bull market could last five to seven years and in the outlier years we should see over US$100 per barrel for WTI on a sustainable basis. Use any market dips to add to positions. For the S&P/TSX Energy Index, we see a pullback to under 130 basis points, which should provide the next great entry point. In the near term, we see overall market weakness as poor earnings results for Q2/19 and concern about the trade battles pressures the general stock market. A 10 to 20 per cent stock market correction is possible into late October 2019.

TOP PICKS

Josef Schachter's Top Picks

Josef Schachter, president at Schachter Energy Research Services Inc., shares his top picks: InPlay Oil, Surge Energy and Touchstone Exploration.

INPLAY OIL (IPO.TO)

This $42-million market cap company reported production of 4,737 barrels of oil equivalent per day (boe/d) in Q1/19 (70 per cent liquids). Their recent release has them at 5,100 boe/d. Their core area is the Cardium, with a growing land position in the emerging Duvernay oil hot play area. Book value is $2.71 per share and our one-year target is $1.80 per share. Cash flow per share  this year is estimated at over $0.55 per share and we forecast production averaging 5,100 boe/d in 2019 with a Q4/19 production level of  over 5,500 boe/d. Debt is only $50 million against Q1/19 equity of $185 million. Compared to most other Canadian energy companies, this one has the highest liquids volume growth projection in 2019.

SURGE ENERGY (SGY.TO)

Surge reported Q1/19 production of 21,630 boe/d (84 per cent liquids) from four core areas. Book value on March 31 was $2.63 per share. Surge pays a very healthy dividend of $0.10 per share annually, paid monthly. This provides a yield of 7.9 per cent. We have a one-year stock price target $2.40 per share. Insiders are significant shareholders and the CEO owns 5.4 million shares. This is a buy.

Surge has a market cap of $390 million. They’re having excellent drilling results in their Eyehill and Betty Lake core areas. In 2018 when WTI was over US$75 per barrel, Surge traded at a high of $2.61 per share. We see crude in 2020 reaching this level again. We own the stock in our dividend-focused funds and plan to buy more over time.

TOUCHSTONE EXPLORATION (TXP.TO)

Touchstone is active in Trinidad and via recompletions and drilling raised production in Q/19 to 2,121 barrels per day up from 1,543 in Q1/18. The exciting upside for Touchstone that attracts us and why we are recommending this stock for the first time is their three well high impact exploration drilling program to start mid-August. The targets are both natural gas and oil and are deeper than their previous drilling. The cost of the wells is US$2.5 million each (80 per cent Touchstone) and they have on the balance sheet US$7.6 million for the program plus their 2019 cash flow of over US$10 million. If the first well, a natural gas development, is successful, production could reach 3,000 boe/d by Q2/20 and to 4,000 boe/d by year-end 2020. Our one-year target is 50 cents. We own the stock ($43 million market cap) and plan to buy more over time.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
IPO N N N
SGY Y Y N
TXP Y Y N

 

PAST PICKS: JULY 16, 2018

Josef Schachter's Past Picks

Josef Schachter, president at Schachter Energy Research Services Inc., reviews his past picks: SDX Energy, Bonavista Energy and Crew Energy.

SDX ENERGY (SDX.V)
Delisted May 24, 2019. Now trades on London AIM Exchange.

  • Then: $1
  • Delisted: $0.37
  • Return: -63%
  • Total return: -63%

BONAVISTA ENERGY (BNP.TO)

  • Then: $1.52
  • Now: $0.44
  • Return: -71%
  • Total return: -70%

CREW ENERGY (CR.TO)

  • Then: $2.19
  • Now: $0.78
  • Return: -64%
  • Total return: -64%

Total return average: -66%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
SDX N N N
BNP Y Y N
CR Y Y N

 

TWITTER: @josefschachter
WEBSITE: www.schachterenergyreport.ca