Josef Schachter's Top Picks
Josef Schachter, president of Schachter Energy Research Services Inc.
Focus: Energy and energy service stocks
I remain cautious on the oil part of the energy market for the near term. Crude prices should fall below US$60 per barrel as Russia and Saudi Arabia are now adding volumes. There’s clear evidence that they’ve already started to lift significant volumes. We’re bullish on natural gas and natural gas stocks. If a significant crude oil inventory build is seen in the OECD and particularly in the U.S., then WTI could fall into the US$50s in the coming months. Hold cash for great buying opportunity once this corrective phase is over.
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 a net asset value 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 Bellatrix on weakness. Our bull market target into 2023 is $20.
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 Drilling 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 ventur in Saudi for excellent prices and will use the proceeds to fund the U.S. expansion. Buy it on weakness. Our bull market target is $14 per share in 2023 if it hasn’t been taken over before then.
SDX ENERGY (SDX.V)
SDX is getting ready to bring on natural gas volumes in Morocco and Egypt in the next two or 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 more than 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’ve 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 more than 7,500 boe/d. Their success with the drill bit is the reason for the volume gains.
PAST PICKS: SEPT. 18, 2017
ESSENTIAL ENERGY (ESN.TO)
Essential Energy is flat since the recommendation as the coil tubing industry is still sluggish. While revenue rose 7 per cent in Q1/18 and net income rose to $5.1 million from $3.5 million in the prior year, wage cost pressure remains a challenge. The whole Canadian drilling industry can’t so far raise day rates. Essential would be a big beneficiary of the go-ahead for the LNG Canada, project as their idle equipment would find use in B.C. when drilling ramps up to meet the 3.8 billion cubic feet usage of the plant. We have a $1.20 target one year out and a bull market peak target of $5 in 2023. Book value at the end of Q1/18 was $1.17 per share.
- Then: $0.59
- Now: $0.55
- Return: -8%
- Total return: -8%
GRAN TIERRA ENERGY (GTE.TO)
Gran Tierra has performed very well since September 2017, with a stock price rise of over 60 per cent. Production in Q2/17 was 31,437 boe/d and has risen into Q1/18 to 35,057 boe/d. This production rise and the lift in crude oil prices are what drove the stock price up so much. We have a $5.50 price target for this year and a bull market peak target of $12 per share on the expectation that they grow production to over 50,000 boe/d by 2023. They’re looking to build a business in Mexico if the fiscal terms meet comparable returns in Colombia.
- Then: $2.63
- Now: $4.25
- Return: 62%
- Total return: 62%
We still hold significant cash reserves for an upcoming buying opportunity.
Total return average: 27%