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

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MARKET OUTLOOK

We’re bullish on natural gas and the land drilling stocks in Canada. They trade at record lows to price-to-net asset value and book value and we see reason for optimism moving into late 2018 and beyond. These reasons include: a focus on condensate, which is in short supply in Alberta, the cutback in drilling for natural gas, the potential for some companies to have over-contracted takeaway capacity, and the very cold winter which has dragged down US natural gas storage to very low levels.

On crude oil we’re near-term bearish as winter is soon ending and inventories will rebuild. In addition, U.S. production is nearing 10.5 million barrels per day and could reach 11 million later this year. We expect WTI to breach US$60 per barrel this month and for it to breach US$50 in April. A double-bottom for the S&P/TSX Energy index below 150 is possible during Q2/18. If so, l we expect to return to the bull camp after this corrective phase is over.

TOP PICKS

SDX ENERGY (SDX.V)

SDX has had a very successful drilling program in Morocco and it’s in the process of bringing on these natural gas wells. They get a very high price for this gas at US$9 per thousand cubic feet (mcf) versus C$1.70/mcf for gas sold in Canada on the spot market. We have a one-year target of $2.00 per share and our bull market target into 2022-2023 of $5.00 per share.

SDX has no debt and US$30.5 million in cash at the end of Q3/17. We expect production to double in 2018 from the Q3/17 level of 3,439 barrels of oil equivalent per day (boe/d). Year-end 2017 results should be out next week. The stock trades at two times our annualized 2019 cash flow. SDX has a lot of high-impact drilling to occur this year that could materially affect the value of the company longer term. In Egypt at their S. Disouq property, they will spud later this month a high-impact well at Ibn Yunus (target of 150 billion cubic feet).

BIRCHCLIFF ENERGY (BIR.TO)

Birchcliff reported excellent Q4/17 results with production having risen to 80,103 boe/d, up 23 per cent from Q3/17 production. We forecast the company to produce 82,250 boe/d in 2018 as they pause activity due to low natural gas prices and takeaway issues for spot gas. Excess cash flow will be used to pay down debt and a 10-cent annual dividend ($.025 quarterly – 3 per cent yield). Volumes are 20 per cent liquids and 80 per cent natural gas. Book value at year end 2017 was $6.30 per share. We see cash flow per share at $1.50 per share in 2018. Our one-year target is $9.00 per share and our bull market target into 2022-2023 is $15.00 per share.

BONAVISTA ENERGY (BNP.TO)

Bonavista reported excellent Q4/17 results with production having risen to 74,799 boe/d, up 5 per cent from Q3/17 production. We forecast the company to produce 75,750 boe/d in 2018 as they pause activity due to low natural gas prices and takeaway issues for spot gas. Excess cash flow will be used to pay down debt and a small dividend (one cent quarterly – 3 per cent yield). Volumes are 29 per cent liquids and 71 per cent natural gas. Book value at year end 2017 was $6.01 per share. We see cash flow per share at $1.42 per share in 2018. Our one-year target is $7.00 per share and our bull market target into 2022-2023 is $20.00 per share.

PAST PICKS:  APRIL 7, 2017

We mentioned at the time that we would wait to buy these stocks when we added them to our recommended list – Our Action Alert BUY list. InPlay was added on Dec. 15 during tax loss season at $1.44 per share and it is up about 10% since then. We added SDX to the Action Alert BUY list on Dec. 22 at $0.94 per share and it’s down currently. Pengrowth has yet to be added to the BUY list as we see more downside ahead in the near term. They are all attractive longer term, but may see some erosion in price if we’re right about lower crude oil prices in Q2/18.

PENGROWTH ENERGY (PGF.TO)   

• Then: $1.43
• Now: $0.81
• Return: -43.35%
• Total return: -43.35%

INPLAY OIL (IPO.TO)

• Then: $2.04
• Now: $1.41
• Return: -30.88%
• Total return: -30.88%

SDX ENERGY (SDX.V)

• Then: $0.89
• Now: $0.86
• Return: -3.37%
• Total return: -3.37%

Total return average: -25.86%