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

MARKET OUTLOOK

Last time I was on Market Call I was still in the bear camp on crude oil, but bullish on natural gas. Since then, our three checklist items to turn overall bullish on both oil and natural gas have occurred: We wanted to see WTI below US$60 per barrel (US$75 on Oct. 9, when I was on last). Done. We wanted to see the S&P/TSX Energy Index below 160 (it was 193 on Oct. 9). Done. We wanted to see the S&P Energy Bullish Percentage Index fall below 10 per cent (it was over 75 per cent bullish on Oct. 9). Also done.

The current cathartic tax loss liquidation is the final phase of this bear market and we see this ending over the next two to three weeks. Thereafter, a new energy bull market that could last over five years should start. Natural gas will be the best-performing commodity at first. That is clearly being seen by the sharp rise in NYMEX natural gas, as low inventories and colder winter weather affect demand. The more bearish the rhetoric, the more we like what we see.

TOP PICKS

CRESCENT POINT ENERGY (CPG.TO)

The stock has been murdered in the recent oil price decline and now trades at nearly $5 per share. Production in Q3/18 was 174,275 barrels of oil equivalent per day (90 per cent oil). The new management team is planning on selling assets to pay down $1 billion of debt (now $4.06 billion against equity of $8.9 billion or book value of $16.18 per share. We see them having U.S. assets that are very saleable to meet this target. The long-standing dividend of $0.36 per share (3 cents per month) is secure. Crescent Point yields over 7 per cent at the current stock price.

SURGE ENERGY (SGY.TO)

Surge reported Q3/18 production of 23,529 boe/d (85 per cent liquids) and will be seeing even more growth as they integrate a new acquisition. Book value is $3.06 per share and cash flow in 2018 should be $0.65 per share. The company pays a very healthy dividend, which is expected to rise to $0.125 per share annually and paid monthly. This provides a potential 2019 yield of 7.3 per cent. We have a one-year stock price target of $3.70 per share. A great total return story.

VERMILION ENERGY (VET.TO)

Vermilion reported Q3/18 production of 96,222 boe/d (56 per cent liquids). They have high netback production, with free cash flow in Europe and a growing stable business in Canada. Vermilion has a dividend of $0.23per month or $2.76 annually for a current yield of 8.5 per cent. Vermilion has never lowered their dividend. We have a $50 one-year target, so the total return is excellent for conservative income investors.

PAST PICKS: NOV. 9, 2017

SDX ENERGY (SDX.V)  

This company is focused on oil and gas production in Egypt and Morocco. They have a great growth profile and a strong balance sheet with US$25 million of cash and no debt. One-year target: $2.

• Then: $0.92
• Now: $0.78
• Return: -15%
• Total return: -15%

BELLATRIX (BXE.TO)

Bellatrix is a very cheap liquids-rich natural gas producer with Q3 production of 33,530 boe/d (72 per cent natural gas). Book value is $11.04 at the end of Q3/18. One-year target: $7.

• Then: $3.25
• Now: $1.11
• Return: -66%
• Total return: -66%

TRINIDAD DRILLING (TDG.TO)

Trinidad had a great Q3/18 and is in the process of moving to a merger with industry leader Precision Drilling. We expect the vote in December will be approved and the cash-only offer by Ensign rejected. We intend to vote for the merger as it allows us to stay involved. The sector does well in the coming energy bull market.

• Then: $1.66
• Now: $1.63
• Return: -2%
• Total return: -2%

Total return average: -28%

TWITTER: @josefschachter
WEBSITE: www.schachterenergyreport.ca