Josef Schachter, president at Schachter Asset Management Inc.
Focus: Oil and gas stocks
We believe that there is excessive optimism about the OPEC deal and that as compliance issues become evident over the coming months, the assumption of a balance between supply and demand for crude oil in the first half of 2017 will prove false. If crude and supply stocks begin to grow after peak winter demand is over in February, then the price of crude will decline. How low the price will go will depend on the U.S. lowering 48 shale production growth, China’s purchases of crude for their Strategic Reserve, the growth in production from Libya and Nigeria (non-quota members of OPEC deal) and how much excess production (cheating) there is by Iran and Iraq. A decline below US$40 is expected, but if all the negative domino’s fall into place then a bust below US$30/barrel is possible in Q2/17.
PENGROWTH ENERGY (PGF.TO) ($1.93)
Pengrowth is a $1.1 billion market cap intermediate Canadian-focused oil and gas producer with production of 55,137 boe/d in Q3/16. Over 60 per cent of production is from liquids with core areas at Lindbergh (thermal oil production: 15,190 b/d in Q3/16), Cardium and Swan Hills light oil and Montney natural gas. PGF has been focused on lowering its debt load and in 2017 will resolve this overhanging concern. They announced in late December a royalty transaction at Lindbergh, which brought in $250 million in cash on January 6, 2017. Total cash should now be $530 million, sufficient with cash flow and debt lines to redeem the $130 million of convertible debentures maturing on March 31 and the US$400 million due in July 2017. Thereafter, PGF will have a decent balance sheet and move forward with its growth strategy. We forecast cash flow of $218 million in 2017 (without further hedge gains) or $0.40/share. Target price 12 months out is $3.00/share. The stock would be a very attractive purchase at <$1.50/share if our crude price decline forecast is realized.
GRAN TIERRA ENERGY (GTE.TO) ($3.99)
Gran Tierra is a $1.5 billion market cap intermediate Colombian-focused oil producer with Q4/16 production of 31,500 b/d and a target of 34,000-38,000 b/d in 2017. They have an attractive portfolio mix of development activity as well as some high-impact exploration potential in the 2017 program. CFPS should rise to US$0.64 in 2017. The stock would be a very attractive purchase at <$3.50/share, which could be seen in Q2/17 if our forecast of lower crude prices is realized. Target 12 months out is $6.00.
SDX ENERGY (SDX.V) ($0.58)
SDX is a junior energy company with a $50 million market cap focused on oil and gas exploration and development activities in Egypt. They should more than double crude oil production in 2017 from the development project at Meseda to >2,300 boe/d by the end of Q2/17. In February, they should spud the SDX-1 well in South Disouq (55 per cent interest) with three targets. The focus is on two natural gas zones (potential >400Bcf) and a deeper oil target with a range, if successful, of 10-50mb. Either of these would be worth >$1.00/share to SDX shareholders. The company should generate $10-12 million of cash flow in 2017 from Gemsa and Meseda, or $0.12-$0.15/share. We believe that the stock trades at the value of its Gemsa and Meseda assets and has no value to the imminent high-impact well, which could significantly change the prospects of the company. News on the well should be out in late March and if successful, production of any material resources of oil or gas could be on-stream in Q2/17. Our 12-month target price is $1.20/share.
PAST PICKS: SEPTEMBER 6, 2016
PENGROWTH ENERGY (PGF.TO)
- Then: $2.03
- Now: $1.84
- Return: -9.35%
- TR: -9.35%
SURGE ENERGY (SGY.TO)
- Then: $2.40
- Now: $3.25
- Return: +35.41%
- TR: +36.60%
TOTAL RETURN AVERAGE: +13.63%