Nov 21, 2019

Josef Schachter's Top Picks: Nov. 21, 2019

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Josef Schachter's Top Picks

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

MARKET OUTLOOK

I have commented regularly on Market Call that I’m a bull on the energy sector and investors should plan on being buyers during market dips and especially the upcoming tax-loss selling season just before Christmas. While we see lower prices for crude into year-end, we look for a recovery into the second half of 2020 to over US$70 per barrel from a low of US$47-$51 over the next few months.

Our view is that a new energy bull market started in February 2016 when WTI was down at US$26 and which could last five to seven years. In the outlier years, we should see over US$100 for WTI on a sustainable basis. Use market dips to add to positions. For the S&P/TSX Energy Index, we see a pullback to under 120 basis points, which should provide the next great entry point during tax-loss selling season.

TOP PICKS

Josef Schachter's Top Picks

Josef Schachter, President, Schachter Energy Research Services, discusses his top picks: Surge Energy, Gran Tierra Energy, Tamarack Valley.

SURGE ENERGY (SGY:CT)

Surge had a decent third quarter, with production at 21,217 barrels of oil equivalent per day(boe/d) as it focused on paying down debt this year. So far, in 2019, they have paid down $71 million at year-end 2018. Liquids were 85 per cent of production in the quarter. The stock is very cheap, trading below the Q3/19 book value of $2.53. Surge pays a monthly dividend of $0.10 per share annually for a yield of 10.1 per cent and a low and sustainable payout ratio of 19 per cent based upon Q3 annualized cash flow. They have a low decline rate of 23 per cent corporately, and over 55 per cent of their lands are underwater floods. We see Surge producing 23,500 boe/d in 2020 (85 per cent liquids) and generating cash flow of $195 million or $0.60 per share. We also see them raising the dividend in the second half of 2020 to one cent per month and still pay down a further $25 million next year. We are investors in the stock and plan to add to our holdings when we see the next low-risk buy signal during tax-loss selling season. This is one of our core dividend model energy holdings.

GRAN TIERRA ENERGY (GTE:CT)

Gran Tierra had a slow ramp-up of its new central processing facility at Acordionero, which resulted in a slower ramp-up of its submersible pumps on its producing wells. Production fell during the quarter to 32,918 b/d from 35,340 b/d in Q2/19. With recent pressure support showing the waterflood is working, additional wells are being brought on. Production is now at 34,000 b/d with five to six more wells to come this quarter. Funds flow in Q3/19 was US$59 million (16 cents per share) versus $85 million in Q3/18. In Q3, they drilled 14 wells and spent US$116.5 million. Gran Tierra has a normal-course issuer bid and bought back 20.1 million shares in the first nine months (the NCIB is now done for the year) for $38 million or at a price of $1.87 per share. We see volumes growing to 37,000 b/d in 2020 and for them to attain cash flow of US$335 million or US$0.91 per share ($1.21 per share Canadian). The stock is trading at its lowest price to book value and price to cash flow. It’s a bargain with a table-pounding buy below $1.30. We recommend buying the stock during tax-loss selling season.

TAMARACK VALLEY ENERGY (TVE:CT)

Tamarack had production of 24,171 boe/d (62 per cent liquids) in Q3/19. The stock is cheap, trading below book value of $3.76 per share on Sep. 30. It was held back in production in the quarter due to apportionment, but it will ramp up production now that the quota system has been ended. Our forecast is for Tamarack to produce 24,050 boe/d in 2019 with a Q4/19 production level rising to 24,800 boe/d. Cash flow per share should lift to $0.97 this year. Tamarack has an active NCIB program and bought 1,745,100 shares in the first nine months at $2.16 per share. Since the quarter end to their release, they bought an additional 715,300 shares at an average price of $1.82 per share. For 2020, Tamarackis planning for flat production, but will have a large spend of $55 million on their waterfloods to move their decline rate down from 38 per cent this year to 34 per cent in 2020, and to 30 per cent in 2021. Our 12-month target is $4 per share. Tamarack is an attractive purchase below $1.65 per share.