Josef Schachter, president of Schachter Energy Research Services Inc

FOCUS: Energy and energy service stocks

MARKET OUTLOOK:

We believe that a new commodity super cycle started in 2020 for energy, metals and grains due to underinvestment and the supply chain issues as we move from globalization to more local sourcing. The war in Ukraine and the COVID lockdown on the east coast of China are just adding to this significant economic reallocation.

However, nothing goes upward in a straight line and the recent high inflation data means that central banks will try to cool inflation by tightening money liquidity and raising interest rates to induce a recession later this year. 

The general stock market is declining, led by the overvalued tech area (NASDAQ). We see the energy area following the general market lower as intermarket margin calls drag the sector downward despite the very strong fundamentals. This reminds us of the ebullient conditions of Q2/08 when the fundamentals were buoyant for the energy sector but the financial crisis hit. We see downside for the Dow Jones Industrials to the 24,000-25,000 area during Q3/22.

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TOP PICKS:

CES Energy Solutions (CEU TSX)

The company provides drilling and production fluids to E&P companies. Revenues in 2021 were $1.19B and adjusted EBITDA was $156M. It has a 36 per cent market share in Canada and a 17 per cent share in the U.S. but has an important 26 per cent position in the Permian basin. The market cap is $680M and it has a working capital surplus of $443M at the end of 2021. With drilling picking up due to the need for secure energy supplies they are in a strong position to grow the company in the years ahead. Our 4-5 year bull market peak target is $11.00.

Gran Tierra Energy (GTE TSX)

Market cap over $700M. It released an update yesterday that you can look at. I see production this year at 32,000 b/d and GTE has a focus this year on paying down debt. My bull market peak target is $7.00 per share. I currently own a position in this stock and have for the last few years.

Touchstone Exploration (TXP TSX)

Touchstone is an E&P company focused on oil and gas development and exploration in Trinidad. In 2020, they had significant success drilling on their exploration block Ortoire and will start bringing on the first of the discoveries in May. By year end 2022, it should be producing over 10,000 boe/d and by the end of 2023, 28,000 boe/d. It has a large exploration inventory thereafter. TXP has a market cap of $300M. We have a 4-5 year bull market peak target is $6.00.

Past Picks: March 24, 2020

Birchcliff Energy (BIR TSX)

• Then: $0.68
• Now: $9.99
• Return: 1,369%
• Total Return: 1,376%

Tourmaline Oil (TOU TSX)

• Then: $7.45
• Now: $63.74
• Return: 755%
• Total Return: 799%

Whitecap Resources (WCP TSX)

• Then: $1.09
• Now: $11.17
• Return: 924%
• Total Return: 965%

Total Return Average: 1,047%