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

MARKET OUTLOOK

I remain cautious on the energy market for the near term as it’s likely a general stock market correction is underway into the end of 2018 and in Canada our shoot-ourselves-in-the-foot approach isn’t helping (both in trade and pipelines). The Trump trade war is escalating and this will be the issue that moves investors from bullish to bearish. The China Shenzhen index is now down 29 per cent from the beginning of the year, showing how trade wars can have a negative impact. Turkey and Argentina are all fighting to the bottom to find out which will have the worst performance year in 2018.

We expect crude oil to fall below US$60 per barrel in the next few months if the trade battle slows world economic growth and a general stock market decline is significant (15 to 20 per cent). Downside for the S&P/TSX Energy Index is below 160 (now 198).

Hold cash for a great buying opportunity in Q4/18 – maybe late October.

TOP PICKS

SDX ENERGY (SDX.V)

SDX is getting ready to bring on more natural gas volumes in Morocco and Egypt in the next two quarters, which will double production levels into year-end 2018. Volumes in Q2/18 were 3,430 barrels of oil equivalent per day (boe/d) and in August, they rose to 4,444 boe/d. By year-end, volumes should rise to over 7,500 boe/d and an exit number that should reach over 8,000 boe/d. SDX has no debt, and cash at the end of Q2 was US$25 million. Removing cash, SDX trades at only 3 times 2018 exit cash flow.

This is a very cheap stock. It’s on our Action Alert BUY list and we’re investors in this company. We have a one-year target of $2 per share for SDX upon reasonable upcoming drilling success and meeting their exit volume target. Our bull market target is $5 per share. We recommended the stock in 2016 when it was at $0.30 per share, again in 2017 when it was at $0.80 and now at $1.01. The reason for the repeat recommendation is that production has gone from 1,200 boe/d in early 2016 to 4,444 boe/d in August 2018 and to an expected exit rate this year of over 7,500 boe/d. Their success with the drill bit is the reason for the volume gains. We recently added to our position.

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. Our cash flow estimate for 2018 is $0.78 per share. This is a very cheap stock.

Upside can come from a material inventory of Cardium oil wells. Petrus 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 and we’re owners of the stock. It’s a buy on current weakness.

BONAVISTA (BNP.TO)

Bonavista reported production of 68,214 boe/d in Q2/18 (74 per cent natural gas). They plan to use excess funds (potentially 40 per cent of cash flow) to pay down debt, which was $809 million at the end of Q2/18 compared to equity of $1.49 billion. Book value at the end of Q2/18 was $5.78 per share and our conservative net asset value was $4.73 per share at year end 2017. Our cash flow estimate for 2019 is $1.08 per share. This is a very cheap stock. Note also that it rose from $0.90 per share in Q1/16 to $5.44 per share that same year. Plus, Bonavista traded at $14.98 per share at the peak of the last bull market in 2014. Our one-year target is $7 per share.

PAST PICKS: NOV. 9, 2017

SDX ENERGY (SDX.V)

• Then: $0.92
• Now: $0.99
• Return: 8%
• Total return: 8%

BELLATRIX EXPLORATION (BXE.TO)

Bellatrix exceeded our forecast for production and cash flow in Q2/18. Cash flow came in at 22 cents versus our forecast of 20 cents. Production rose to 37,309 boe/d in Q2/18, up from 36,740 boe/d in Q1/18. The stock is trading significantly below book value of $12.11 at June 30. This is a very cheap stock and is on our Action Alert BUY list and we’re also investors in the stock. Buy on weakness. Our bull market target into 2023 is $20. We have recently added to our position in the stock.

• Then: $3.25
• Now: $1.16
• Return: -64%
• Total return: -64%

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 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 is very cheap (book value $4.63 per share at June 30). Our bull market target is $7 per share in 2023 if it hasn’t been taken over before then. We recently started buying this stock as it fell due to the end of a sale process. The recent bid by Ensign is seen as a non-starter. They need to raise the price materially or add a share component if they’re to attract Trinidad shareholder attention. We would prefer the company to stay independent or become the consolidator instead of the prey.

• Then: $1.66
• Now: $1.75
• Return: 5%
• Total return: 5%

Total return average: -17%

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WEBSITE: www.SchachterEnergyReport.ca