Full episode: Market Call for Monday, September 16, 2019
Josef Schachter, president of Schachter Energy Research Services
Focus: Energy and energy service stocks
I’ve said regularly on Market Call that I’m a bull on the energy sector and that 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 winter 2019-2020 to over US$70 from a low of US$46 to US$48 over the next few months as weaker world demand due to trade worries and the fall build season lowers prices in the near term.
Our view is that a new energy bull market started in February 2016 when WTI was US$26, and that it could last five to seven years. In the outlier years, we should see more than 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. In the near term, we see overall market weakness as the trade battle tweets by U.S. President Donald Trump pressure stocks. 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.
CREW ENERGY (CR:CT)
Last purchased at $0.68.
Crew trades very cheaply as the market worries about their debt level and low natural gas prices for the strip and AECO spot. The company is focusing on spending less than cash flow and using excess funds to pay down its debt level, which was $343 million on June 30. Equity at the end of Q2/19 was $919 million. Cash flow per share in 2019 should be 67 cents ($106 million) and 77 cents ($120 million) in 2020 on our forecast of 24,500 barrels of oil equivalent per day (boe/d). We’re fans of management and CEO Dale Shwed owns 4.7 million shares. We plan to buy more of this stock over time. Our one-year target is $1.80, so there is lots of upside ahead.
Crew is very close to the route of the new Coastal GasLink pipeline, which will deliver gas from the Dawson Creek area to the LNG Canada plant in Kitimat, B.C. In the 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.
SURGE ENERGY (SGY:CT)
Last purchased at $1.14
Surge reported Q2/19 production of 21,544 boe/d (84 per cent liquids) from four core areas. It pays a very healthy dividend of $0.10 per share annually paid monthly and providing a yield of 8.8 per cent. We have a one-year price target of $2.40.
Insiders are significant shareholders and Surge’s CEO owns 5.4 million shares. They’re having excellent drilling results in their Eyehill and Betty Lake core areas. In 2018 when WTI was over US$75, Surge traded at a high of $2.61 per share.
We see crude in reaching over US$70 in the second half of 2020, so the target is achievable. If we see consistent prices over US$70, Surge could get board approval to increase the dividend once again. A $0.12 per share dividend is our expectation. We plan to add more Surge to our holdings when we see the next low-risk buy signal from the S&P Energy Bullish Percent Index. The stock traded at over $7.50 per share as recently as 2012.
TOUCHSTONE EXPLORATION (TXP:CT)
Last purchased at $0.24.
Touchstone is active in Trinidad and via recompletions and drilling raised oil production in Q2/19 to 1,768 b/d. The exciting upside for Touchstone is its three-well high impact exploration drilling program started this year. The company just announced it found four gas-bearing zones at the COHO-1 well. It will be tested in October and could be on in Q1/20.
The second exploration well is an oil target, which should spud in October with news before year-end. The cost of the wells is US$2.5 million each and they have on the balance sheet US$7.3 million for the program plus their 2019 cash flow of over US$10 million. Production could reach 3,000 boe/d in Q2/20 and over 4,000 boe/d by end of 2020. Our one-year target is 50 cents and our bull-market target is $2 per share. We plan to buy more of the stock over time. This is our favourite exploration idea. The stock traded at over $2.50 per share as recently as 2012.
PAST PICKS: OCT. 9, 2018
- Then: $1.70
- Now: $0.77
- Return: -55%
- Total return: -55%
PETRUS RESOURCES (PRQ:CT)
- Then: $1.12
- Now: $0.29
- Return: -74%
- Total return: -74%
TRINIDAD DRILLING (TDG:CT)
Acquired by Ensign Energy on Feb. 2, 2019.
- Then: $1.95
- At acquisition: $1.68
- Return: -14%
- Total return: -14%
Total return average: -48%