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

MARKET OUTLOOK

Over the last six months, I’ve said on BNN Bloomberg that I’m now a bull on the energy sector. All of the items in our checklist to turn bullish on oil and natural gas have occurred. For oil, OPEC is making significant cutbacks, Iran sanctions will return this spring and Venezuelan production problem continues. While we see lower prices in May and June for oil as inventories build this spring, our outlook gets more positive once the summer driving season starts. We look for US$55 per barrel in the second quarter and then a recovery into the fourth quarter to over US$70 per barrel.

As for natural gas, this past winter’s cold weather in North America along with the storage at five-year lows set the stage for higher prices this winter. Longer term, rising LNG exports from the U.S. Gulf Coast and further closures of coal-fired electricity-generating facilities in North America will increase demand.

We think a new energy bull market started in February 2016 when WTI was at US$26 per barrel. This bull market could last over five years. Use any market dips to add to positions. From the fourth-quarter low, the S&P/TSX Energy Index has risen from 127 to 171 points or 35 per cent and some stocks like Birchcliff, Crescent Point, Questerre, Tamarack and Whitecap have risen by more than 50 per cent. A pullback now to the 140 level should provide the next great entry point.

TOP PICKS

SURGE ENERGY (SGY.TO)
Bought at $1.36 per share.

Surge reported first-quarter production of 21,630 barrels of oil equivalent per day (84 per cent liquids) from four core areas. Book value at March 31 was $2.63 per share. Surge pays a very healthy dividend of $0.10 per share annually, paid monthly. This provides a yield of 7.5 per cent. We have a one-year stock price target of $3.70 per share. Insiders are significant shareholders. Buy on weakness below $1.25 per share. Surge has a market cap over $400 million.

CANACOL ENERGY (CNE.TO)
Bought at $4.06 per share.

Canacol is a natural gas producer in Colombia that gets a fabulous US$4.97 per thousand cubic feet at the wellhead. Production is being ramped up from 122 to 215 million cubic feet per day next month or so. Production was 22,063 barrels of oil equivalent per day (boe/d) and this should grow into year-end 2019 to over 34,000 boe/d and cash flow per share in 2019 should be US$0.87. Further growth can come from ongoing development drilling and from high impact exploration activity. Canacol has a market cap over $700 million. Our one-year target is $8 per share. Buy on weakness below $4 per share.

GRAN TIERRA ENERGY INC (GTE.TO)
Bought at $2.82 per share.

Gran Tierra is focused on production in basins in Colombia and last year added complimentary acreage in Ecuador that has great potential. Production in the first quarter was 38,163 barrels per day (100 per cent oil) and the stock has a market capitalization of over $1 billion. Cash flow in 2019 should be US$380 million. In 2019 they should drill 26 to 30 development wells and six to eight exploration wells with a spend including acquisitions of US$440 million. We look for Gran Tierra to exit 2019 with production in excess of 43,000 barrels per day. The stock is trading at the lowest valuation we have seen in our lengthy coverage of the company. Our one-year target is $5.50 per share. Buy on weakness below $2.75 per share.

PAST PICKS: DEC. 17, 2018

SURGE ENERGY (SGY.TO)

• Then: $1.41
• Now: $1.24
• Return: -12%
• Total Return: -9%

VERMILION ENERGY (VET.TO)

• Then: $28
• Now: $28.89
• Return: 3%
• Total Return: 7%

WHITECAP RESOURCES (WCP.TO)

• Then: $4.14
• Now: $4.68
• Return: 13%
• Total Return: 16%

TOTAL RETURN AVERAGE: 5%