Josef Schachter, president at Schachter Energy Research Services Inc.

Focus: Energy and energy service stocks

MARKET OUTLOOK

I have commented on BNN Bloomberg Market Call over the last six months that 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 this month, shipping attacks show the vulnerability of the crude oil shipping lanes and Venezuela production problems continue. While we see a breach of US$50 per barrel in the short-term, our outlook gets more positive when the summer driving season starts. We look for a recovery into winter 2019 to 2020 over US$70 per barrel from a low of US$46 to 48 per barrel in the near-term. Our view is that a new energy bull market started in February 2016 when West Texas Intermediate (WTI) was US$26 per barrel which could last five to seven years. Use any market dips to add to positions. For the S&P/TSX Energy Index (now at 138) we see a pullback to the 130 level which should provide the next great entry point.

TOP PICKS

SURGE ENERGY (SGY.TO)

Surge reported first quarter production of 21,630 barrels of oil equivalent per day (boe/d) at (84 per cent liquids) from four core areas. Book value at March 31, 2019 was $2.63 per share. SGY pays a very healthy dividend of $0.10 per share annually, paid monthly. This provides a yield of 9.0 per cent. We have a one-year stock price target $2.40 per share. Insiders are significant shareholders. The CEO owns 5.4 million shares. BUY! Surge has a market cap of $350 million. 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.

TAMARACK VALLEY ENERGY (TVE.TO)

Tamarack reported first quarter production of 23,149 boe/d (64 per cent liquids). Book value at March 31, 2019 was $3.56 per share.  TVE has an excellent balance sheet with only $189 million of debt versus $809 million of equity (23 per cent debt).  We have a one-year stock price target $4.00 per share. BUY! Tamarack has a market cap of $430 million. In 2018 when WTI was over US$75 per barrel, TVE traded at a high of $5.20 per share. We see crude in 2020 reaching this level again.

TOURMALINE OIL (TOU.TO)

Tourmaline reported first quarter production of 293,434 boe/d (18 per cent liquids). Their new Gundy plant is ramping up and liquids volumes should rise to 72,500 barrels per day by the year-end from 55,010 barrels per day in March. Book value at March 31, 2019 was $28.07 per share.  TOU has an excellent balance sheet with only $1.5 billion of debt against $7.6 billion of equity (19 per cent debt).  Tourmaline now has a dividend of 12 cents per quarter (started in 2018 and raised three times from an original 8 cents). They have also initiated a five per cent normal-course issuer bid on June 17, 2019.  We have a one-year stock price target $24.00 per share. BUY! Tourmaline has a market cap of $4.2 billion. In 2018 when WTI was over US$75 per barrel, TOU traded at a high of $25.70 per share. We see crude in 2020 reaching this level again.

BELLATRIX EXPLORATION (BXE.TO)

Bellatrix has completed its recapitalization and a 12-for-one reverse split. This restructuring lengthened their debt and rolled $110 million of debt into equity.  The stock has been hammered and is very cheap but so are a lot of other natural gas liquids companies.  We plan to add to our holdings on the next low risk buying opportunity.    

• Then: $1.34
• Now (with 12:1 split): $1.03
• Return: -94%
• Total return: -94%

TRINIDAD DRILLING (ESI.TO)

Trinidad Drilling was taken over by Ensign Drilling for $1.68 per share in December 2018. It was a take-under but a profitable investment, our cost was $1.47 per share.

• Then: $1.82
• Takeover finalized Feb. 20, 2019: $1.68
• Return:  -8%
• Total return: -8%

SDX ENERGY (SDX.LON) 

SDX announced that they were ending their trading on the TSX Venture Exchange to only be on the London AIM exchange. We recommended selling as this disenfranchised Canadian shareholders. We remain appalled by this move.

• Then: $1.12
• Delisted May 24, 2019: $0.37
• Return: -67%
• Total return: -67%

Total return average: -56%

TWITTER: @josefschachter

WEBSITE: www.schachterenergyreport.ca