Josef Schachter, president of Schachter Energy Research Services Inc.
FOCUS: Energy and energy service stocks
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MARKET OUTLOOK

We turned bullish last week on natural gas, small and medium cap energy stocks and the land drillers. Many of these stocks are down 50 to 70 per cent in 2017 and are being devastated by severe tax-loss selling. There are bargains galore! We added nine stocks to our Action Alert BUY list last week (after having none all year). We expect to add more names this week to this list as the end of tax-loss selling season is this coming Friday. 

On the sector we expect a double bottom phenomenon to occur as was seen in 2008/2009. Natural gas stocks bottomed in late 2008 and bounced in early 2009 and then retreated as oil stocks were hit hard on the price decline for crude in early 2009. A decline in crude is expected in early 2018 to below US$40/BBL for WTI which will take large cap oil stocks and offshore drillers lower. Once this unfolds we should get a second low and a buying opportunity for these stocks as well. From this second low the new energy bull market should commence and last into 2022-2023.

TOP PICKS

All of our stock picks are natural gas stocks that have been devastated by the current low price of natural gas and the smackdown of tax-loss selling this year. These stocks are discounting a very bearish environment for longer than we think is reasonable. The three picks are bargains and will see significant upside in the new energy bull market of 2018 to 2022-2023.

BELLATRIX EXPLORATION (BXE.TO)
BXE is a natural gas focused company that had production in Q3/17 of 37,710 boe/d of which 75 per cent is natural gas. It is focused on the Spirit River liquids rich natural gas play in Alberta which has economics as attractive as the popular Montney area. In 2017 we see the company keeping production flat and using any excess cash to pay down debt. The stock is cheap on a price to book value (Q3/17 of $15.93 per share). We have a 12-month target of $7.00 per share and a three to five year bull market target of $20.00. BXE traded at $58.25 during the heady days of 2014.

BONAVISTA ENERGY (BNP.TO)
BNP is a natural gas focused company that produced 71,191 boe/d in Q3/17 of which 71 per cent is natural gas. To keep production flat in 2018 they only need to spend $160M so any excess cash will be allocated to pay down debt. At the end of Q3/17 debt was $722M and BNP expects to pay down $100M in 2018 and a further $100M in 2019. BNP pays a dividend of $0.04 per year ($0.01 per quarter). We expect in 2019 they should be able to increase the dividend. Our 12-month stock price is $7.00 and our 30 year target is $20.00 per share. The stock traded at over $15 per share in the heady days of 2014. The all time high was in 2011 when it traded at $22.24 per share.

BIRCHCLIFF ENERGY (BIR.TO)
BIR produced 65,276 boe/d in Q3/17 (79 per cent natural gas). The company has significant growth in outlier years as it expands its plant at Pouce Coupe. We forecast average production in 2018 of 85,000 boe/d and cash flow that exceeds $1.50 per share even if natural gas prices stay depressed during 2018. The stock trades significantly below Q3/17 book value of $6.30 per share. BIR pays an annual dividend of $0.10 (paid quarterly).  Our 12-month target is $9.00 for this large cap natural gas focused company. Our three to five year bull market target is $15.00 per share. In the heady days of 2014 the stock traded at a high of $14.70 per share.

PAST PICKS: APRIL 7, 2017

PENGROWTH ENERGY (PGF.TO)
Pengrowth was hit by 27 per cent this year as the company went through its asset sale process to pay down debt. This is now done and the company is focusing on their thermal growth project at Lindbergh. We mentioned in April to wait for a lower entry price and we expect to issue and Action Alert BUY sometime in Q1/18, when we turn bullish again on crude oil. Our one year target into late 2018 is $2.60 per share and our 3-5 year bull market target is $6.50 per share.

• Then: $1.43
• Now: $1.01
• Return: -29.37%
• Total return: -29.37%

INPLAY OIL (IPO.TO) 
InPlay Oil was hit nearly 30 per cent as the whole junior cap sector was devastated in 2017. We recommended buying the stock on weakness and last week we finally issued an Action Alert BUY on the stock for our Black Gold subscribers. Our 12-month target is $3.60 per share and our 3-5 year bull market target is $6.00 per share.

• Then: $2.04
• Now: $1.59
• Return: -22.05%
• Total return: -22.05%

SDX ENERGY (SDX.V)
SDX has had a very successful drilling program in Morocco and is in the process of bringing on these wells. They get a very high price for this gas @ US$9/mcf versus C$1.70/mcf for gas sold in Canada on the spot market. The stock is flat since our coverage on the show. We have a  one year target of $2.00 per share and a 3-5 year bull market target of $5.00 per share. SDX has no debt and US$30.5M in cash at the end of Q3/17. We expect production to double in 2018 from the Q3/17 level of 3,439 boe/d.

• Then: $0.89
• Now: $0.90
• Return: 1.12%
• Total return: 1.12%

TOTAL RETURN AVERAGE: -16.76%