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

MARKET OUTLOOK

I’ve said regularly on Market Call 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 (US$54.65 last Friday). 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 near term.

Our view is that a new energy bull market started in February 2016 when WTI was US$26 which could last five to seven years and 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 (now at 135 basis points) 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 U.S. President Donald Trump pressure stock price levels. A 10 to 20 per cent overall stock market correction (Dow Jones Industrials and the TSX) is possible before the end of 2019.

TOP PICKS

CREW ENERGY (CR:CT)
Last purchased at $0.68.

CR trades very cheaply as the market worries about their debt level and low natural gas prices for the strip and AECO spot. Q2/19  production was 22,865 boe/d (31% liquids – up from 28% in the prior year as they bring on  more of their Ultra Condensate Rich wells) and they showed cash flow of $23M or 15 cents in the quarter. They are focusing on spending less than cash flow and using excess funds to pay down their debt level, which was $343M at June 30th. Equity at he end of Q2/19 was $919M (book value $5.88/share). CFPS in 2019 should be 67 cents ($106M) and in 2020 on our forecast of 24,500 boe/d - 77 cents ($120M).

We are fans of management and the CEO, Dale Shwed, owns 4.7M shares, so he is aligned with shareholders. We own the stock and plan to buy more over time. 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 which will deliver gas from the Dawson Creek area to the LNG plant of LNG Canada at Kitimat BC. 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% liquids) from four core areas. Book Value at June 30st was $2.61 per share. SGY pays a very healthy dividend of $0.10 per share annually, paid monthly. This provides a very healthy yield of 8.8%. We have a one year stock price target $2.40 per share. Insiders are significant shareholders. The CEO owns 5.4M shares. BUY! Surge has a market cap of $350M (debt $387M and equity book value of $821M) . They are having excellent drilling results in their Eyehill and Betty Lake core areas. In 2018 when WTI was over US$75/b, SGY traded at a high of $2.61 per share.

We see crude in 2H/20 reaching over US$70/b so the target is achievable. It is likely in 2H/20 if we see consistent prices over US$70/b that SGY could get Board approval to increase the dividend once again. A $0.12 per share dividend (a penny a month) is our expectation. We are investors in the stock and plan to add 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 TXP, and why we are recommending the stock, is their three well high impact exploration drilling program started this year. The first target, a gas one appears to be a success. The COHO-1 well was drilled to 8,560 feet and found four gas bearing zones in the key Herrera zone was announced on September 9th. It will be tested in October and if the results show productive capacity of over 8Mmcf/d then it will be brought on in Q1/20. They need to build a 3.2Km tie in to a nearby Shell gas plant. The price of gas onshore is US$2.85/mcf and they own 80% of the well so they will net over 1,000 boe/d once on stream.

This play has 2-3 more development locations for full development. The second exploration well is an oil target Cascadura-1 which should spud in October with news before year end. The cost of the wells are US$2.5M each and they have on the balance sheet US$7.3M (June 30th) for the program plus their 2019 cash flow of US$10M+. Production could reach 3,000 boe/d in Q2/20 and over 4,000 boe/d by year end 2020. Our one year target is 50 cents and our bull market target is $2.00 per share. We own the stock and plan to buy more over time. This is our favourite exploration idea at this time. The stock traded at over $2.50 per share as recently as 2012.

Disclosure:          Personal              Family   Portfolio/Fund

CR TSX  Y              Y              N

SGY TSX                Y              Y              N

TXP TSX                Y              Y              N

PAST PICKS: October 9, 2018

InPlay Oil (IPO:CT)

•             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 February 2, 2019

•             Then: $1.95

•             At acquisition: $1.68

•             Return: -14%

•             Total return: -14%

Total return average: -48%