Full episode: Market Call for Monday, September 18, 2017
Josef Schachter, author, Schachter Energy Report
FOCUS: Energy and Energy Service Stocks
I remain in the bear camp expecting lower energy prices in the coming months. We expect demand will seasonally weaken now that the summer driving season has ended and that supply will grow from the U.S. (post the Hurricane difficulties) and from Canada, Libya and Nigeria. Overall the surplus could rise to over 1Mb/d driving crude prices below US$40/b in the October/November time window. Energy and Energy Service stocks are vulnerable to a 20 per cent plus decline into year end. Tax loss pressure in the sector this year may be severe. Our top picks for today’s show are attractive now but we see downside even in these names. We will provide purchase price levels (not current levels) for each of the names.
ESSENTIAL ENERGY SERVICES (ESN.TO)
Is the largest coil tubing service provider in Canada. It trades at a discount to Q2/17 book value of $1.14 per share. In a sector recovery in 2018 we see revenues rising to $180M ($140M in 2017) and with margin improvement seeing ESN generate cash flow rising to $0.18 per share. The stock is an attractive BUY below $0.50/share and our one year target is $1.20 per share.
GRAN TIERRA ENERGY (GTE.TO)
Is a very successful producer of oil in Colombia. In Q2/17 they had production of 31,437 boe/d and announced some very encouraging exploration results which are being followed up on with development drilling and a focus on new productive zones. They have an aggressive exploration program ahead of them over the next few years. The stock trades cheaply on a price to book value and price to net asset value basis. We see production averaging 38,000 boe/d in 2018 and cash flow per share coming in at US$0.58 per share. The stock is an attractive BUY below $2.50/share and our one year target is $5.50 per share.
We hold cash for a great buying opportunity in the sector late this year as tax loss pressure drives stocks lower in an environment of weaker energy prices as seen in 2015 etc.
PENGROWTH ENERGY (PGF.TO)
- Then: $2.03
- Now: $0.81
- Return: -60.09%
- Total Return: -60.09%
SURGE ENERGY (SGY.TO)
- Then: $2.40
- Now: $2.05
- Return: -14.58%
- Total Return: -11.66%
TOTAL AVERAGE RETURN: -23.91%