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

MARKET OUTLOOK

I remain bullish on the energy sector long-term once we get past the current quarantine and economy reopening issues later this year. Demand and supply should be in balance during late Q3/20 and crude prices should exceed US$40 per barrel during winter. The near-term inventory issues are why we are currently 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 recovery rally from late March we see as overdone and now look for another down-leg as crude storage inventories will continue to build into July. The market has been focused on the demand recovery and over time will start to look at the balance of supply and demand and see that the inventory glut remains, resulting in crude prices retreating.

We are now offering a complimentary macro energy product for those interested in the sector called “Eye on Energy,” which provides a weekly review of the macro events affecting the sector. Go to www.schachterenergyreport.ca to subscribe.

TOP PICKS

CANACOL ENERGY (CNE TSX)

Canacol is a natural gas producer in Colombia with a fabulous price of US$3.60 per 1,000 cubic feet. Production in Q1/20 was 35,648 barrels of oil equivalent per day (boe/d), up 62 per cent from 22,063 boe/d in Q1/19. Cash flow last quarter was US$38 million, up 51 per cent from last year. We’re forecasting this year an annual cash flow of US$158 million or US$0.87 per share. Further growth can come from ongoing development drilling and from high-impact exploration activity, which will allow them to enter new markets in natural gas shortage Colombia.

Canacol has a market cap over $600 million. Our one-year target is $5 per share. It pays a $0.052 quarterly dividend, providing a yield of 5.9 per cent. We have an SER Quality Score Rating of “A” on Canacol. Buy on weakness.

PIPESTONE ENERGY (PIPE TSXV)

Pipestone is an emerging liquids-rich Montney natural gas producer that has over 140 net sections of land in the heart of the condensate fairway. Production in Q1/20 ramped up to 14,066 boe/d (38 per cent liquids). They will see their next growth phase in Q4/20, when more volumes come on for the lucrative winter season. Funds flow last quarter was $11.8 million, up from a loss of $8.7 million in Q1/19. We’re forecasting this yea an annual cash flow of $40 million, or $0.25 per share. They have built-in growth in 2021 from two already completed six-well pads and more egress committed. Pipestone has a market cap over $100 million. Our one-year target is $1.50 per share. We have an SER Quality Score Rating of “B.” Buy on weakness.

TRICAN WELL SERVICE (TCW TSX)

Trican is Canada’s largest fracker, with operations in cementing and coil tubing. While the energy service industry is under pressure for the next few quarters due to low activity levels, we see activity picking up this winter. The stock should recover as investors become more comfortable with the sector. We expect the fourth quarter will see decent activity in the natural gas side of drilling due to declining production and low storage in western Canada. Trican has an excellent balance sheet, with only $52 million or 8 per cent debt/equity (equity of $582 million). It has a positive working capital of $136 million or $0.50 per share. Cash flow in Q1/20 was $13.4 million, up from $3.5 million in Q1/19 as they had tight cost controls. We’re forecasting an annual cash flow of $45 million or $0.17 per share this year.

Trican has a market cap over $175 million and is very active (repurchased over 23 per cent since the start of their normal course issuer bid), using free cash flow to buy shares. During Q1, it bought back 4.76 million shares for $5 million at an average price of $1.04 per share. Our one-year target is $1.50 per share. We have an SER Quality Score Rating of “B.” Buy on weakness.

PAST PICKS: MAY 24, 2019

SURGE ENERGY (SGY TSX)

• Then: $1.30
• Now: $0.29
• Return: -78%
• Total return: -76%

GRAN TIERRA ENERGY (GTE TSX) 

• Then: $2.75
• Now: $0.38
• Return: -86%
• Total return: -86%

CANACOL ENERGY (CNE TSX)

• Then: $4.07
• Now: $3.64
• Return: -10%
• Total return: -8%

Total return average: -57%

TWITTER: @josefschachter
WEBSITE: www.schachterenergyreport.ca