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

The current rally in crude oil from July to the present has been on the back of transitory items. First, the four hurricanes that closed in onshore and offshore production in the U.S. Gulf of Mexico area, and second, the political upheaval in Saudi Arabia. This rally from US$42/bbl to over US$57/bbl appears to be exhausted and way overdone. We now expect the fundamental data showing record and growing U.S. production and rising cheating by OPEC to drive crude prices lower into the end of Q1/18. 

TOP PICKS

SDX ENERGY (SDX.V)
SDX is focused on oil and natural gas production in Egypt and Morocco. Production in Q2/17 was 3,707 boe/d and this should double by Q3/18, as new natural gas production comes on in Morocco (great gas price US$12/mcf versus Canada C$2.70/mcf) and natural gas and oil volumes in Egypt. The company has an active development program in both countries as well as some very attractive exploration upside potential in coming quarters. SDX is debt free and recently was sitting on US$37M before a more active Q3 and Q4 this year. Over the next few years we expect SDX to grow volumes over 10,000 boe/d and generate significant cash flow. Our one year target is $2.00 per share and our next bull market peak target is $5.00 per share. The stock would be a great buy <$0.80 per share.  

BELLATRIX EXPLORATION (BXE.TO)
A natural gas focused company in the "Spirit River" play in Alberta. The company in Q2/17 produced 37,916 boe/d/ and $0.21 per share cash flow. We expect cash flow per share to come in at $0.83 in 2017 and at $0.93 in 2018. The stock trades below book value at the end of Q2/17 at $16.30 per share. Liquids are 24 per cent of volumes and the company has an excellent natural gas hedge book. The stock would be a great buy <$3.00 per share. Our one year target is $7.00 and our next bull market target is $20. It last traded at over $20 per share in Q1/15.

TRINIDAD DRILLING (TDG.TO)
TDG is one of Canada’s largest land drillers with operations in Canada (70 Rigs), the U.S. (68 Rigs) and internationally (3 countries 11 rigs). Activity is picking up particularly in the U.S., so we should see rising cash flow going forward. Revenues in 2017 should reach $500M and EBITDA $130M. Cash flow per share should come in at $0.41 this year and $0.56 in 2018. The stock trades substantially below book value of $4.99 at the end of Q2/17. We recommend purchase of the stock below $1.50 per share. Our one year target is $3.00 and our next bull market peak target is $7.00 per share.

PAST PICKS: JANUARY 9, 2017

PENGROWTH ENERGY (PGF.TO)
PGF has done a great job paying back debt and is now ready for its next growth phase. The stock has rallied sharply on short covering. It would be a great buy again <$1.00 per share.

• Then: $1.86
• Now: $1.50
• Return: -19.35%
• Total return: -19.35%

GRAN TIERRA ENERGY (GTE.TO)
GTE is adding volumes at a good pace in Colombia via a mix of development drilling and some very high impact exploration drilling. The balance sheet is in great shape. It would be an attractive buy again below $2.50 per share.

• Then: $3.78
• Now: $2.85
• Return: -24.60%
• Total return: -24.60%

SDX ENERGY (SDX.V) 

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

TOTAL RETURN AVERAGE: -7.51%