Josef Schachter's Top Picks: Oct. 9, 2019

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

MARKET OUTLOOK
I remain cautious on the overall energy market for the near term as it is likely tax loss selling season this year could be quite painful. The Trump trade war is escalating. The China Shenzhen index is down 30 per cent from the start of 2018 showing how trade wars are having a negative impact.

We expect crude oil to fall below US$60 per barrel in the next few months if the trade battle slows world economic growth. The Iran production fears are exaggerated as there’ll be sufficient oil going forward with rising production from Russia, OPEC and the U.S. Downside for the S&P/TSX Energy Index during the upcoming tax loss season is to below 160. We’ve been bullish for the last six months on natural gas stocks and the recent LNG Canada announcement has helped these stocks perform very well.

Hold cash for a great buying opportunity during tax loss selling season in November-December.

TOP PICKS

INPLAY OIL (IPO.TO)

The company reported production of 4,396 barrels of oil equivalent per day (boe/d) in Q2/18 (71 per cent liquids). Their core area is the Cardium, with lands in the emerging Duvernay oil hot play area. In mid-September, they announced the sale of non-core assets in West Pembina for $16.7 million or $66,800 per boe (much above the current valuation of the company). The proceeds will be used to accelerate their program in the Cardium into year end. With August levels of 4,900 boe/d, they now expect to exit 2018 at 5,100 to 5,200 boe/d. Book value is $2.83 per share and our one-year target is $3.60 per share. Cash flow per share (CFPS) this year is estimated at $0.53 per share.

PETRUS RESOURCES (PRQ.TO)

Petrus reported production of 9,246 boe/d in Q2/18 (71 per cent natural gas). They’re using excess funds to pay down debt, which was $129 million at the end of Q2/18. Book value at the end of Q2/18 was $2.72 per share. This is a very cheap stock. Upside can come from a material inventory of Cardium oil wells. The company is looking to sell some of its non-core assets and use the proceeds to pay down debt. Our one-year target is $2.40 per share.

TRINIDAD DRILLING (TDG.TO)

Trinidad’s Q2/18 results showed wonderful improvement in the U.S. and more importantly in Canada. Funds flow for Q2/18 came in as expected at $30.8 million or 11 cents per share versus $10.5 million or four cents per share in Q2/17. Operating margin in Canada improved in Q2/18 from $3,557 per day last year to $7,331 this year. In the U.S., operating margin rose from US$4,901 to US$6,472 per day. The U.S. is doing much better with rising activity rates and they will add rigs to their Permian fleet. Utilization in the U.S. rose to 63 per cent from 48 per cent last year. This is the key growth area for the company for the next year or so. Trinidad Drilling is very cheap (it had a book value of $4.63 per share on June 30). Our bull market target is $7 per share in 2023 if it hasn’t been taken over before then. The recent bid by Ensign is a non-starter. Ensign needs to raise the price materially or add an equity component if they are to attract Trinidad shareholder attention. We would prefer the company to stay independent or become the consolidator instead of the prey.

PAST PICKS: DEC. 18, 2017

BELLATRIX EXPLORATION (BXE.TO)

Bellatrix exceeded our forecast for production and cash flow in Q2/18. CFPS came in at $0.22 versus our forecast of $0.20. Production rose to 37,309 boe/d in the quarter up from 36,740 boe/d in Q1/18. The stock trades below book value of $12.11 on June 30. This is a very cheap stock and is on our Action Alert BUY list. Their core area is the liquids-rich Spirit River play. CFPS estimate for 2018 is $0.95 per share.

• Then: $2.00
• Now: $1.35
• Return: -33%
• Total return: -33%

BONAVISTA ENERGY (BNP.TO)

Bonavista is spending less than cash flow so that it can pay down debt this year. Production in Q2/18 was 68,214 boe/d and they generated cash flow per share of $0.25. We look for volumes to grow to 74,000 boe/d in 2019 (75 per cent natural gas) and for CFPS to reach $1.08 per share. Book value on June 30 was $5.78 per share. This is a very cheap stock and is on our Action Alert BUY list. Bonavista is a beneficiary of the LNG Canada project.

• Then: $1.96
• Now: $1.44
• Return: -27%
• Total return: -25%

BIRCHCLIFF ENERGY (BIR.TO)

Birchcliff production in Q2/18 rose 18 per cent to 76,296 boe/d (80 per cent natural gas) and had CFPS of $0.27 in the quarter. Birchcliff is a big beneficiary of the LNG Canada project and the stock has been a great performer this year up nearly 80 per cent form the February 2018 low. In 2019 we see the company having production of 85,800 boe/d (78 per cent natural gas) and have CFPS of $1.53. Book Value was $6.42 at the end of Q2/18. Our one-year target price is $9.00 per share.

• Then: $4.15        
• Now: $5.06
• Return: 22%
• Total return: 24%

Total return average: -11%

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WEBSITE: www.schachterenergyreport.ca