Schachter expects temporary oil price drop
Pro's 3 Stars: Delayed drilling gives stock pause
By Gyle Konotopetz - Business Edge
Published: 09/01/2006 - Vol. 6, No. 18
(Business Edge columnist Gyle Konotopetz regularly profiles the top stock picks of some of Canada's most accomplished investment pros.)
FEATURED PRO: Josef Schachter is president of Schachter Asset Management, a Calgary firm that specializes in institutional research in the oil and gas sector.
Schachter's View: "My guess is that there may be an additional couple dollars of weakness in oil prices (from a recent price in the $70 US per barrel range) over the next few weeks until winter because we're entering the shoulder season after summer demand. The issues (favouring oil demand) are supply problems in Nigeria and Alaska, and continuing strong demand in China and India. Storage in North America is nearly full, but you still have lots of capacity in Asia and Europe. So if you have demand of a million barrels a day less than supply for the months of September, October and half of November over 75 days, you need to find a home for 75 million barrels. The bears are saying there's a glut in North America and therefore the price of oil should go down to $50. We don't concur with that. We think that you're going to see the price of oil maybe drop a little bit from here, but the storage will be filled up in Asia and Europe and it can more than take all of that (excess) of 75 million barrels.
"I think everybody realizes that we had a lucky (warm) winter last year and if we don't have (another) lucky winter, inventories could be in a difficult situation in the long term. The average price of oil we're using for our (research) models for the next two to three years is $70 (up from the firm's previous forecast of $54). For natural gas (recently in the $6.90 US range per mcf NYMEX), because of the softness (in demand) and the lack of a hurricane season, we're currently using a price of $7. But in 2007 we're going to a $9 US number for natural gas because we believe that once we get into winter, deliverability will be a problem and that people will finally realize this industry is not investing enough to replace declines. My guess is that before the end of this year, we'll push through 400 on the index (S&P/TSX Energy Index) to close the year at an all-time high."
(Business Edge columnist Gyle Konotopetz regularly profiles the top stock picks of some of Canada's most accomplished investment pros.)
First Star
* Real Resources (TSX:RER)
* Recent Price: $21.97.
* 52-Week Range: $19-$29.50.
* Snapshot: Real is an oil and gas company that has grown through the drill bit with an aggressive exploration program. The company is focused on five core areas in Alberta and southeastern Saskatchewan, and its production is evenly weighted between natural gas and light oil.
* CEO: Lowell Jackson.
* Head Office: Calgary.
* Vital Stats: Current Price/Earnings Ratio, 15.5; Revenue (last 12 mos), $186.6 million; 5-Yr Revenue Growth, 40.4 per cent; Earnings (last 12 mos), $53.4 million; 5-Yr Earnings Growth, 41.7 per cent; Market Cap, $821.7 million; Shares Outstanding, 37.4 million.
* Schachter's View: "We expect them to finish this year at 16,500 to 17,000 boe (barrels of oil equivalent) a day. When you look at that kind of production heading into next year, that generates about $5 of annualized cashflow (per share). We're saying that, based on the proven reserve life index, this stock deserves about a $38 (12-month) target. Insiders own about 10 per cent of the company."
* Schachter's Risk Rating: Low.
* Web Watch: www.realres.com
Second Star
* Sterling Resources (TSXV:SLG)
* Recent Price: $3.
* 52-Week Range: $1.38-$3.38.
* Snapshot: Sterling is an international oil and gas company with key projects in the U.K., North Sea and Romania.
* CEO: Stewart Gibson.
* Head Office: Calgary.
* Vital Stats: Revenue (last 12 mos), $0; Earnings/Loss (last 12 mos), $2.7 million Loss; Market Cap, $281.6 million; Shares Outstanding, 93.9 million.
* Schachter's View: "Sterling is partnered with OilExco (TSX:OIL) in a play called Cheryl (in the U.K. North Sea). This play, we think, could produce at least 15,000 gross (boe) a day, which would be 5,000 (boe) a day to Sterling. Potentially, it could be 25,000 boe a day gross, which would be materially above our forecast. We're assuming that if it is 15,000 boe, which would be 5,000 to Sterling, it could be on (production) in the fourth quarter of 2007. If it is, that would generate cashflow of about $1.25 a share. With the stock at $3, we think that is cheap. On top of that, the company has a very big land position in Romania of 1.5 million acres. They are starting to drill the first of three wells. Each of these three plays could add $2 of NAV (net asset value) if they were successful. We're thinking that maybe one of three (wells) comes in (successfully), which gives you more upside. The third part of the story is that they have another play in the U.K. North Sea, where Mobil (Oil) had a major gas discovery going back 20 years. This play, if it's as big as they think, could add another $5 to $8 of NAV. We think there's very little downside in the stock right now and we have a $5-plus (12-month) target on this stock."
* Schachter's Risk Rating: Moderate.
* Web Watch: www.sterling-resources.com
Third Star
* International Frontier Resources (TSXV:IFR)
* Recent Price: $1.05.
* 52-Week Range: $0.86-$2.48.
* Snapshot: International Frontier is an oil and gas company focused on potential high-impact plays in the central Mackenzie Valley area of the Northwest Territories and the U.K. North Sea.
* CEO: Pat Boswell.
* Head Office: Calgary.
* Vital Stats: Revenue (last 12 mos), $900,000; Earnings/Loss (last 12 mos), $600,000 Loss; Market Cap, $42.31 million; Shares Outstanding, 40.3 million.
* Schachter's View: "This is a company with no production. But they have land in the Northwest Territories where they're working with (project operator) Husky Energy, which has already had some success in the area. The reason the stock has backed off is because they've delayed their drilling to do more seismic work instead. The market took that negatively, but they want to get a better idea of what's going on in terms of the drilling. What we like about this company in the near term is that they're involved in another project called Laurel Valley Prospect (in the U.K. North Sea) where they are paying nothing, yet they have a 10.4-per-cent interest. The driller is OilExco. The well could be drilled by late '06 or early '07. We think this has a 20-per-cent success rate, but the NAV potential for IFR is over $5 on the upside. They also have a number of other prospects in the U.K. North Sea that could get drilled in '07. This company is well funded, they have no debt and the insiders own about 11 per cent. We have a (12-month) target price of $3, so we think this is an attractive situation for high-risk or speculative institutional accounts."
* Schachter's Risk Rating: High.
* Web Watch: www.internationalfrontier.com
Schachter's Edge Record (past 12 mos): +12.3 per cent. Best Pick: Sterling Resources (TSXV:SLG) +91.1 per cent. Worst Pick: Centurion Resources (TSX:CUX) -45.5 per cent.
Disclosure: Schachter Asset Management provides research on the featured companies for Maison Placements Canada and members of Schachter Asset Management have positions in all three stocks. Maison Placements has been involved in underwritings for Real Resources and Sterling Resources in the past 12 months.
(This feature is provided for information purposes. Investors are advised to do their own research or consult a qualified investment professional before making investment decisions.)
(Gyle Konotopetz can be reached at gyle@businessedge.ca)
web watch:
www.realres.com
www.sterling-resources.com
www.internationalfrontier.com
copyright 2004 Business Edge
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