Josef Schachter, president of Schachter Energy Research Services Inc.

Focus: Energy and energy-service stocks
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MARKET OUTLOOK
I remain in the bear camp for now. I expect rising U.S. crude production, weak worldwide demand, rising output from non-quota OPEC countries (Libya and Nigeria) to keep inventories high, and to depress crude oil prices further over the coming. Once crude falls below US$40/barrel, it may get very ugly for the energy markets and prices could fall sharply for most energy stocks.

I look for the liquidation period to unfold over a three- to five-month period and a major market bottom to be seen before the end of 2017. This final shakeout should set the stage for a multi-year, new energy bull market. We are providing our subscribers with new coverage on attractive opportunities but not adding them to our Top Picks list yet. Until crude busts US$40/barrel, it is too early to buy, even though valuations are getting very cheap.

TOP PICKS

BIRCHCLIFF ENERGY LTD. (BIR.TO)
Market cap $1.5 billion. BIR is one of the lowest-cost Montney players with a rising mix of liquids after the Gordondale acquisition. Production in Q1/17 was 61,662 boe/d and cash flow per share came in at $0.26. Our forecast is for BIR to average 71,000 boe/d in 2017 and produce CFPS of $1.32. The stock trades below book value per share of $$6.74, below our flat pricing conservative NAV of $9.27 per share and also below the deal price of shares done to finance the Gordondale acquisition from Encana done at $6.25 per share. Our one-year target is $13.00 per share and our next bull market three- to five-year target is $24.00. The stock would be an attractive purchase below $6.00 and a table-pounding buy under $5.25 per share.

SURGE ENERGY INC. (SGY.TO)
Market cap $467 million. SGY is focused on three core oil areas with low declines. Production in Q1/17 was 13,866 boe/d and CFPS came in at $0.10. Our forecast for SGY is for it to average 14,340 boe/d in 2017 and produce CFPS of $0.39. SGY pays a dividend of $0.095 (paid monthly) so it provides a current yield of 4.6 per cent. The stock trades below book value of $3.48 per share. The stock would be an attractive purchase below $2.00 per share and a table-pounding buy at below $1.80 per share. Our 12-month target is $3.70 per share and our three- to five-year bull market target is $8.50 per share.

WESTERN ENERGY SERVICES CORP. (WRG.TO)
Our first recommendation in the energy service sector. Market cap $144 million. WRG is an energy service company operating a fleet of drilling rigs, service rigs, and has an oilfield equipment rentals business operating in both Canada and the U.S. Revenue in Q1/17 was $84.4 million, EBITDA was $18.6 million and CFPS was $0.04. Our forecast for 2017 is for revenues to reach $180 million and in 2018 with a crude price revival, $310 million. Book value at the end of Q1/17 was $5.45 per share. The stock is cheap at a discount to book value, price to cash flow and price to sales versus historic peaks. We see the stock rising to $4.80 per share in 2018 when we see more robust energy prices and much higher activity rates for service companies. Our three- to five-year bull market target is $11.00, making for a wonderful return in the upcoming new energy bull market cycle. The stock would be an attractive buy at under $2.00 and a table-pounding buy at below $1.90 per share.
 

PAST PICKS: SEPTEMBER 6, 2016

PENGROWTH ENERGY (PGF.TO)

• Then: $2.03
• Now: $1.16
• Return: -42.85%
• TR: -42.85%

SURGE ENERGY (SGY.TO)

• Then: $2.40
• Now: $2.24
• Return: -6.66%
• TR: -4.58%

CASH

TOTAL RETURN AVERAGE: -23.71%

All of our recommendations today are ones we like for the next three- to five-year bull market, expected to start later this year. All three of these stocks face some continued downside pressure but we will note at what level they are attractive buys and what level they are table-pounding buys. In addition, we will highlight our one-year targets and as well our three- to five-year bull market targets.