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

MARKET OUTLOOK

I’ve commented regularly that I’m a bull on the energy sector and investors should plan on being buyers during market dips. While we see a breach of US$50 per barrel in the short term, we look for a recovery into the second half of 2020 to over US$70 from a low of US$47-$51 over the next few months as weaker world demand due to trade worries and the fall build season lowers prices near term. Our view is that a new energy bull market started in February 2016 when WTI was down at US$26 and that it should 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, which should provide the next great entry point during tax-loss selling season. In the near term, we see overall market weakness as the trade battle tweets by Donald Trump pressure stock price levels. A 10 to 20 per cent overall stock market correction (for the Dow Jones Industrials and the TSX) is possible before the end of 2019.

TOP PICKS

CREW ENERGY (CR:CT)

Crew trades very cheaply as the market worries about its debt level and low natural gas prices for the strip and AECO spot. Second-quarter production was 22,865 boe/d (31 per cent liquids, up from 28 per cent the prior year) and they showed cash flow of $23 million. They’re focusing on spending less than cash flow and using excess funds to pay down their debt level, which was $343 million on June 30. Equity at the end of the second quarter was $919 million. Cash flow per share in 2019 should be 67 cents ($106 million) and 77 cents ($120 million) in 2020 based on our forecast of 24,500 boe/d. We’re fans of management and the CEO owns 4.7 million shares. Our one-year target is $1.80, so there is lots of upside ahead.

Crew is one of the companies we like for the potential of LNG on the west coast. They are very close to the route of the new Coastal Gas line. Longer term, Crew could be a takeover candidate as the LNG operators tie down reserves to meet their long-term contracts. The stock traded at over $21 per share as recently as 2011.

GRAN TIERRA (GTE:CT)

Gran Tierra is focused on production in basins in Colombia and last year added a complimentary acreage in Ecuador that has great potential. Production in Q2/19 was 35,340 b/d (100 per cent oil) and the stock has a market capitalization of over $500 million. Cash flow in 2019 should be US$360 million. In 2019, they should drill 26 to 30 development wells and six to eight exploration wells. We look for Gran Tierra to exit 2019 with production in excess of 40,000 barrels per day. The stock is trading at the lowest valuation we’ve seen in our lengthy coverage of the company. Our one-year target is $5.50 per share. We’re fans of management and the CEO owns 2.5 million shares. Buy on weakness during tax loss selling season. The stock now tradews below its PDP reserve value.

TOURMALINE OIL (TOU:CT)

Tourmaline reported Q2/19 production of 280,547 boe/d (19 per cent liquids). Their new Gundy plant is now on stream and liquids volumes should rise to 72,500 b/d by year-end from 51,993 in Q2. Book value was $28.55 per share on June 30. Tourmaline has an excellent balance sheet with only $1.6 billion of debt against $7.8 billion of equity (20 per cent debt). Tourmaline now has a dividend of 12 cents per quarter (started in 2018 and raised three times from an original 8 cents). They have initiated a 5 per cent Normal Course Issuer bid. We have a one-year stock price target $24 per share. In 2018 when WTI was over US$75, Tourmaline traded at a high of $25.70 per share. We see crude in the second half of 2020 reaching this level again. The stock now trades at its lowest level ever. We are fans of management and their historic track record for shareholders. The CEO owns 16.9 million shares, the largest CEO ownership of any company we cover.

PAST PICKS: NOV. 19, 2018

CRESCENT POINT ENERGY (CPG:CT)

• Then: $4.96
• Now: $4.99
• Return: 1%
• Total return: 3%

SURGE ENERGY (SGY:CT)

• Then: $1.74
• Now: $1.14
• Return: -34%
• Total return: -30%

VERMILION ENERGY (VET:CT)

• Then: $33.59
• Now: $19.49
• Return: -42%
• Total return: -36%

Total return average: -21%