Josef Schachter, President, Schachter Asset Management

FOCUS: Canadian oil and gas stocks

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MARKET OUTLOOK:

Energy prices have been very volatile over the last two years and this may remain the case into 1H/17. Between OPEC’s desire for more market share, Iran and Iraq raising production and Libya hoping to re-enter the market and add 1.0Mb/d in Q4/16, there will be great volatility in the sector. We see crude having downside risk to the low US$30s over the next few months due to the end of the summer driving season, lower demand in the fall shoulder season and OPEC production increasing production during the latter part of the year. Inventories are growing again (EIA data showed a build in crude and products of 4.5Mb last week in the U.S.) and we may see storage fill up in the coming months, further pressuring oil prices.

We look for oil prices to improve in winter 2016-to-2017 and we may see a breach into the US$50s if inventories start to decrease and U.S. production falls below 8.3Mb/d later this year. If that occurs, supply and demand will be in balance and the large inventory overhang will start to abate. We are bullish for 2H/17 but expect lower crude and stock prices over the next few months. Downside for the S&P/TSX Energy Index is the 140 level (now 195).


Top Picks

Pengrowth Energy (PGF.TO)

  • PGF produced 56,735 boe/d in Q2/16 (62 per cent liquids) and had CFPS of 16 cents.
  • We estimate CFPS in 2016 to be $0.68/share or $375M.
  • Paying down debt, may do asset sales in 2017 when asset prices recover even further.
  • Has been very successful hedger, using hedge book profits to pay down debt.
  • Trades at discount to book value and NAV.
  • BUY <$1.50/share, Target 2H/17 $2.40/share.

Surge Energy (SGY.TO)

  • Produced 12,182 boe/d in Q2/16 (78 per cent liquids) and had CFPS of 10 cents in the quarter.
  • Estimate 2016 2H/16 production to rise to over 14,000 boe/d by Q4/16.
  • Trades significantly below book value of $3.58/share (Q2/16).
  • Very strong balance sheet and long life reserves in three core areas.
  • BUY <$2.00/share, Target 2H/17 $3.70/share

Cash

Disclosure Personal Family Porfolio/Fund
PGF  N N N
SGY  N N N

 

Past Picks: April 22, 2016

Birchcliff Energy (BIR.TO)

  • Then: $4.82
  • Now: $9.29
  • Return: +92.74%
  • TR: +92.74%

Gran Tierra Energy (GTE.TO)

  • Then: $3.77
  • Now: $3.85
  • Return: +2.12%

Pengrowth Energy (PGF.TO)

  • Then: $1.88
  • Now: $2.03
  • Return: +7.71%
  • TR: +7.71%

Total Return Average: +34.19%

Disclosure Personal Family Porfolio/Fund
BIR N N N
GTE N N N
PGF N N N

 

Website: http://e-sami.com