Josef Schachter, author of the Schachter Energy Report
Focus: Energy and energy service stocks

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MARKET OUTLOOK

We became bullish on the natural gas and land drilling stocks during the tax-loss selling season of 2017. Since then, we’ve been waiting for the next decline phase in oil which is expected to last into the end of the second quarter of 2018. The price of crude has already fallen from US$66.66 per barrel in late January to US$61.79 at the close on Feb. 7. We expect the continuing increases in U.S. crude production to over 10 million barrels per day (b/d) (10.25 million on Feb. 7 according to the EIA report) will, as it heads past 10.5 million b/d, drive crude below US$60 during February and below US$50 during the second quarter. This should give us a wonderful buying opportunity late in Q2/18 in the oil, frack and offshore drilling stocks.

The S&P/TSX Energy Index, at 172.74 on Feb. 7, should drop below the 2017 low of 162.75 this month and decline to below 150 during Q2/18, setting up a bottom that should last for a few years. We look for an extended new bull market to start from this low and last into 2022-2023 with the index maybe tripling in the new energy bull market.

TOP PICKS

BIRCHCLIFF ENERGY (BIR.TO)

Birchcliff produced 65,276 barrels of oil equivalent per day (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 the first half of the year.

The stock trades significantly below Q3/17 book value of $6.30 per share. Birchcliff pays an annual dividend of $0.10 (paid quarterly). Our 12-month target is $9 for this large-cap, natural-gas-focused company. Our three-to-five year bull market target is $15 per share. In the heady days of 2014, the stock traded at a high of $14.70 per share.

BELLATRIX EXPLORATION (BXE.TO)

Bellatrix Exploration is a natural-gas-focused company that had production of 37,710 boe/d in Q3/17, 75 per cent of which was natural gas. It’s focused on the Spirit River liquids-rich natural gas play in Alberta, which has economics as attractive as the popular Montney area.

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 per share and a three-to-five year bull market target of $20. The stock traded at $58.25 during the heady days of 2014.

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 at US$12 per thousand cubic feet (mcf) on new contracts versus less than $2/mcf for gas sold in Canada on the spot market.

In Egypt at their S. Disouq core area, they will drill two development wells and bring on initial production in Q3/18. In addition, two exploration wells will be drilled in the first half of 2018, which are high-impact wells if successful. The targets indicate trillions of cubic feet of gas potential.  We have a one-year target of $2 per share and a three-to-five year bull market target of $5 per share. SDX has no debt and US$30.5 million in cash at the end of Q3/17. We expect production to double into year-end 2018 to over 7,500 boe/d.

PAST PICKS: JAN. 9, 2017

On all three names we said to buy them on weakness. Our first recorded “buy” recommendation on SDX Energy was done on Dec. 22, 2017 during tax-loss selling season at a price of $0.94.

PENGROWTH ENERGY (PGF.TO)

Pengrowth remains very cheap and should do well in the upcoming energy bull market. For now, we’d hold off buying as we’re bearish near-term on the price of crude oil. If the stock retreated to less than $0.75, it would become an attractive buy. We have a one-year target of $2.60 per share.

• Then: $1.86    
• Now: $0.87     
• Return: -53.22%
• Total return: -53.22%

GRAN TIERRA ENERGY (GTE.TO)

Gran Tierra Energy remains very cheap as well and continues to make progress at their Colombian projects. They’re adding production via development drilling in their core areas and have had some initial success from a large exploration program. For now, we’d hold off buying as we are bearish near-term on crude oil. If the stock retreated to less than $2.75, it would become an attractive buy. We have a one-year target of $5.50 per share.

• Then: $3.78
• Now: $3.18
• Return: -15.87%
• Total return: -15.87%

SDX ENERGY (SDX.V)

SDX has been a great performer over the last year as they’ve increased production, added new plays and had a very big exploration success at their S. Disouq property. We added SDX to our Action Alert BUY list on Dec. 22 and in early 2018 purchased the stock for ourselves. We continue to add to our holdings on weakness. We have a one year target of $2 per share

• Then: $0.70
• Now: $0.85
• Return: 21.42%
• Total return: 21.42%

Total return average: -15.89%