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

MARKET OUTLOOK

I remain a long-term bull on the energy sector once we get past the economic reopening issues and see a vaccine for COVID-19 readily available in 2021. Crude oil demand and supply should be in balance during late Q3/20 and prices should exceed US$50 per barrel during winter 2020-2021. The near-term inventory issues are why we are cautious. There are lots of great stocks to buy which have material long-term growth prospects, but we recommend using windows of market routs to be buyers. We were buyers of our favourite energy and energy service ideas during the plunge in the stocks in mid-March. Our approach is to buy on harsh shake-out periods in the market. The short-covering rally from late March we see as overdone and we have now started another down-leg as crude storage inventories continue to build. The market has been focused on the demand recovery and over time will start to relook at the balance of supply and demand and see that the inventory glut remains and is getting worse, resulting in crude prices retreating again and below US$30 per barrel. When we were on the show last on May 20, we advised a cautious approach. The S&P/TSX Energy Index peaked in early June at 96.07 points and is now at 76.70 or down by 20 per cent. We expect this index to breach the low of mid-March during the second half of 2020.

TOP PICKS

BIRCHCLIFF ENERGY (BIR TSX)

Birchcliff had production of 73,580 boe/d (78 per cent natural gas) in Q1/20. For 2020 we see cash flow per share of $0.75 as Birchcliff reduced their capex plan on March 11 to $275-$295 million from $340-360 million. Production should average 78,000 boe/d in 2020. The company is one of our favourite natural gas stocks for the new energy bull market. It’s very cheap at the current price (book value at $6.19 per share at the end Q1/20 and net asset value of $11.96 per share).

We have a one-year target at $4 per share. We are investors in the stock and added to our holdings during the mid-March market crash. We have an SER Quality Score Rating of “B” on Birchcliff. Buy on weakness below $1.00 per share.

CANACOL ENERGY (CNE TSX)

Canacol is a natural gas producer in Colombia that gets a fabulous price of US$3.60 per thousand cubic feet. Production in Q1/20 was 35,648 boe/d, up 62 per cent from Q1/19. Cash flow was US$38 million, up 51 per cent from last year. Our forecast for this year is US$158 million or US$0.87 annual cash flow. Further growth can come from ongoing development drilling and from high impact exploration activity, allowing them to enter new markets in gas-short Colombia.

Canacol has a market cap over $660 million. Our one-year target is $5 per share. It pays a $0.052 quarterly dividend, providing a yield of 5.7 per cent. We see the dividend as sustainable. We have an SER Quality Score Rating of “A” on Canacol. Buy on weakness below $3.40 per share.

TOUCHSTONE EXPLORATION (TXP TSX)

Touchstone is active in Trinidad and produces over 1,300 b/d of oil. The exciting upside and why we own the stock is their high impact natural gas exploration drilling program in the country. They have drilled two successful liquids-rich natural gas exploration wells. The first success COHO-1 will be onstream by early Q4/20 and will take their volumes over 2,800 boe/d. Their second and much bigger success at Cascadura-1 may be on in 2021 after they drill a few appraisal wells to meet the productive potential. Volumes at the end of 2021 could be north of 20,000 boe/d. Touchstone could be generating annualized C$0.35 cents of cash flow per share by late 2021. Once this production is on, we see the stock trading over $1.50 per share. Additionally, Touchstone still has other exploration targets (Chinook and Royston). They have a healthy balance sheet to meet their capex goals. We have an SER Quality Score Rating of “B” on Touchstone. Buy on weakness.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
BIR Y Y N
CNE N N N
TXP Y Y N

 

PAST PICKS: JUNE 20TH, 2019

SURGE ENERGY (SGY TSX)

  • Then: $1.19
  • Now: $0.38
  • Return: -68%
  • Total return: -66%

TAMARACK VALLEY ENERGY (TVE TSX)

  • Then: $2.28
  • Now: $0.92
  • Return: -60%
  • Total return: -60%

TOURMALINE OIL (TOU TSX)

  • Then: $16.74
  • Now: $11.93
  • Return: -29%
  • Total return: -26%

Total return average: -51%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
SGY Y Y N
TVE N N N
TOU Y Y N

 

TWITTER: @josefschachter
WEBSITE: www.schachterenergyreport.ca