May 1, 2018

Josef Schachter's Top Picks: May 1, 2018

BNN Bloomberg

Schachter , BNN

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

_______________________________________________________________

MARKET OUTLOOK

I remain cautious on the energy market for the near term as it’s likely a general stock market correction of 15 to 20 per cent is underway. The momentum and the FANG stocks are leading the way downward. Rising interest rates with the 10-year U.S. Treasury breaching 3 per cent should accelerate the downside. The greenback is strengthening and, with rising U.S. domestic production, this should take crude prices below US$60 per barrel in the coming weeks. Downside for the S&P/TSX Energy Index is to below 150 points (now at 199 levels).

Hold cash for a great buying opportunity in late Q2 or during Q3 of this year.

TOP PICKS

BELLATRIX EXPLORATION (BXE.TO)

Bellatrix reported production of 37,077 barrels of oil equivalent per day (74 per cent natural gas) in Q4/17: Up 16 per cent from the 31,888 boe/d in Q4/16. For 2018, we see production rising to 38,000 boe/d into year-end as they run the business conservatively in the current tough environment. Book value is $15.67 per share at year-end and our conservative net asset value (NAV) is $13.68 per share at the end of 2017. Note that cash flow per share in 2017 was $1.12 per share: very cheap versus the current stock price.

The stock was added to our Action Alert BUY list at $1.87 per share on Dec. 13 and we purchased our first shares on Jan. 5 at $2.10, adding more personally as the stock has been hit. Our one-year target is $7.00 per share. While this may seem crazy, the stock rose from $2.40 in Q1/09 to $23 per share one year later. That is the power of a new bull market; we see one starting for energy in the second half of 2018 which could last into 2022 or 2023.

BONAVISTA ENERGY (BNP.TO)

Bonavista reported production of 74,799 boe/d in Q4/17 (71 per cent natural gas): Up 8 per cent from 69,399 boe/d in Q4/16. In 2018m they will only grow moderately to 75,750 boe/d and use excess funds (potentially 40 per cent of cash flow) to pay down debt which was $800 million at year-end compared to equity of $1.54 billion. Book value at year-end 2017 was $6.01 per share and our conservative NAV was $4.73 per share at year end 2017. Note that cash flow per share in 2017 was $1.18 per share: not far from the current stock price. This is a very cheap stock. Also note the stock rose from $0.90 per share in Q1/16 to $5.44 per share that same year.

At the peak of the last bull market in 2014, Bonavista traded at $14.98 per share. We added the stock to our Action Alert BUY list on Dec. 15 at $1.78 per share, personally purchasing our initial position on Jan. 5 at $1.89. We’ve added more shares to our holdings as the stock’s been hit. Our one-year target is $7.00 per share.

CASH

We want to have a meaningful cash position to take advantage of the much weaker prices we see in the coming months.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
BXE	Y	Y	N/A
BNP	Y	Y	N/A

PAST PICKS: JULY 28, 2017

GRAN TIERRA ENERGY (GTE.TO)

A billion-dollar market cap, Colombian-focused oil company with production in Q4/17 of 34,477 boe/d. The company is growing via development of new zones found in producing fields and via the drilling of high-impact exploration wells. Gran Tierra reports in U.S. funds and we look for them to have cash flow per share of more than US$0.60 in 2018. Our one-year target is $5.50. The stock would be an attractive purchase at less than $3.00 per share.

Then: $2.94
Now: $4.16
Return: 41%
Total return: 41%

BELLATRIX EXPLORATION (BXE.TO)

Then: $3.17
Now: $1.89
Return: -40%
Total return: -40%

WESTERN ENERGY SERVICES (WRG.TO)

We added Western Energy’s stock to our Action Alert BUY list on Dec. 22 at $1.16 per share. The company exceeded our Q4/17 forecast. The stock is very cheap, trading below the 2017 year-end book value of $4.19 per share. We have a $2.50 per share one-year target. Buy it on upcoming market weakness. Western Energy traded over $11 in 2014, the peak of the last energy bull market.

Then: $1.51
Now: $1.16
Return: -23%
Total return: -23%

Total return average: -7%