Mar 24, 2020

Josef Schachter's Top Picks: March 24, 2020

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Full episode: Market Call for Tuesday, March 24, 2020

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

MARKET OUTLOOK

I remain a bull on the energy sector long term as we will still be using oil in the decades ahead. Demand for oil will pick up once we get past the current quarantine requirement. Investors should plan on taking advantage of the destruction in the sector caused by the dual black swans of the COVID-19 virus and the Saudi-Russia oil price war. WTI prices in the low US$20s do not work for any of the producers and after some pain has usually reversed, with significant price recovery as high-cost production gets shut in. There are lots of great stocks to buy which have significant long-term growth prospects and in many cases still provide attractive dividends even though these have been somewhat reduced by some of the companies as a defensive survival move. We also see bargains in the energy infrastructure stocks and recommend investors do their homework on the great buys in that area. We have been buyers of our favourite energy ideas and yesterday added to some of our positions. Our approach is to buy on harsh down days in the market.

TOP PICKS

Josef Schachter's Top Picks

Josef Schachter of Schachter Energy Research shares his top picks: Birchcliff Energy, Tourmaline Oil and Whitecap Resources.

BIRCHCLIFF ENERGY (BIR TSX)

Birchcliff had production of 77,977 barrels of oil equivalent per day (78 per cent natural gas) in 2019. Cash flow per share (CFPS) came in for 2019 at $1.26 per share. The good cash flow results were due to higher liquids production (22 per cent) and lower overall costs. For 2020, we see CFPS of $1 as Birchcliff reduced their capex plan on March 11 to $275-$295 million from $340-360 million. As a result, volumes will be flat for the year. Birchcliff has a dividend of $0.105 paid quarterly, currently providing a 17.8 per cent yield. They have given no indication they need to cut the dividend. The company is one of our favourite natural gas stocks for the new energy bull market, the big potential of LNG exports on the West Coast and it’s very cheap at the current price (book value at $6.38 per share at the end of 2019, and net asset value of $11.96 per share). We are keeping our one-year target at $5 per share. We have added to our holdings during the current market crash.

TOURMALINE OIL (TOU TSX)

Tourmaline reported Q4/19 production of 299,844 boe/d (19 per cent liquids). Their new Gundy liquids plant is on stream and liquids volumes should rise to 68,000 barrels per day by year-end from 59,886 in Q4. Book value at year=end was $29.40 per share. Tourmaline has an excellent balance sheet with only $1.6 billion of debt against $8 billion of equity (20 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), providing a 48 cent dividend and a yield of 7.1 per cent. They have normal course issuer bid and will have free funds flow this year to buy back shares. We have a one-year stock price target $24 per share and the stock now trades at its lowest valuation level ever. We are fans of management and their historic track record for shareholders. CEO Mike Rose owns 16.9 million shares, the largest CEO ownership of any company we cover. We recently became shareholders of Tourmaline and plan to build up our position during the current market malaise.

WHITECAP RESOURCES (WCP TSX)

Whitecap’s production was 71,050 boe/d in 2019 (84 per cent liquids). Cash flow in 2019 was $676 million or $1.64 per share. Net capex in 2019 was $407 million. On March 17, the company lowered their capex program due to the current uncertainties to $200-210 million from $350-370 million. Production is expected to fall off to 67,000 or 68,000 boe/d. To conserve cash they lowered their monthly dividend from 2.85 cents per month to 1.425 cents per month or 17.1 cents per year, providing a current yield of 19.4 per cent. Even if they cut spending again, the stock is cheap. Debt at $1.2 billion compares to equity of $2.9 billion and they are in a debt repayment mode. We see cash flow in 2020 of at least $410 million or $1 per share, providing them with funds to pay the dividend of $70 million and the capex of $210 million (our model) and still retire $130 million of debt. We are owners of the stock and have added to our holdings during the current market crash.