Mar 28, 2019

Josef Schachter's Top Picks: March 28, 2019

BNN Bloomberg

Josef Schachter , BNN Bloomberg

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

MARKET OUTLOOK

I have repeatedly stated on BNN Bloomberg that I’m now a bull on the energy sector. All of the items in our checklist to turn bullish on oil and natural gas have occurred.

For oil, OPEC is making significant cutbacks, U.S. production has stalled, Iran sanctions will return this spring and the tragic Venezuela problem continues. While we see near-term lower prices for oil as inventories build this spring, our outlook gets more positive after the summer driving season begins. We look for US$50 per barrel in the second quarter and then a recovery into the fourth quarter to over US$70 per barrel.

For natural gas, this past winter’s cold weather in North America along with the storage at five-year lows set the stage for higher prices this summer and then winter. Longer term, rising LNG exports from the U.S. Gulf Coast and further closures of coal-fired electric generating facilities in North America will increase demand.

We think a new energy bull market has started and it could last for over five years. Natural gas will be the better performing commodity. Use the market dip this spring to add to positions.

TOP PICKS

GRAN TIERRA ENERGY (GTE.TO)

Gran Tierra is focused on production in basins in Colombia and recently added complimentary acreage in Ecuador that has great potential. Production in the fourth quarter was 38,156 barrels per day (100 per cent oil) and the stock has a market capitalization of over $1 billion. Cash flow in 2018 was US$306 million versus a spend of US$330 million. In 2019, they should drill 26 to 30 development wells and six to eight exploration wells, with spending including acquisitions of US$440 million. We look for Gran Tierra to exit 2019 with production in excess of 43,000 barrels per day.

The stock is trading at the lowest valuation we have seen in our lengthy coverage of the company. Our one-year target is $5.50 per share and our bull-market-peak target into 2023 is $12 per share.

HIGH ARCTIC ENERGY SERVICES (HWO.TO)

High Arctic is an energy service company with heli-mobile drilling rigs in Papua New Guinea (focus on natural gas for the LNG export market – two new trains being added by key operators in the country) and service rigs in Canada and the U.S. In 2018, revenues were $203 million and earnings before interest, tax, depreciation and amortization (EBITDA) were $48.7 million. High Arctic has no debt and had $32 million of cash on the balance sheet at year end 2018. The company pays a monthly dividend equal to 20 cents annually which provides a healthy and sustainable 5.3 per cent dividend yield. They have an active normal course issuer bid (NCIB) program and bought shares in 2019 at $3.88 per share.

This is our first time making High Arctic a top pick. Our one-year target is $4.80 per share and our bull market target into 2023 is $18 per share. This stock has a market cap of around $200 million.

TOUCHSTONE EXPLORATION (TXP.TO)

Touchstone is active in Trinidad. Through recompletions and drilling the company has raised production recently to 2,358 barrels per day, up from 1,758 in the third quarter of 2018. Year-end 2018 results are not yet out.

The exciting upside for Touchstone that attracts us and why we’re recommending this stock for the first time is their three-well high-impact exploration drilling program starting in June. The targets are both natural gas and oil and are deeper than their previous drilling. The cost of the wells is US$2.5 million each and they have on the balance sheet US$11 million for the program. Our one-year target is 50 cents and $2 into the peak of the new energy bull market into 2023. Over time, we expect to see the company to enter other countries in the area. This is a small-cap stock with a market cap of over $30 million.