One up, one down
Mason Granger is bullish. Joseph Schachter is bearish. Who's right?
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at firstname.lastname@example.org
by Max Fawcett
It takes both a buyer and a seller to make a market, and that was certainly on display yesterday on BNN. In the afternoon edition of Market Call, Joseph Schachter, the president of Schachter Asset Management, delivered a decidedly bearish perspective on the energy sector, noting that he was still holding lots of cash and waiting patiently for an opportunity to deploy it. “The underlying fundamentals in the oil and gas industry are still quite negative,” he said, noting that new production from North America alone is outstripping global demand growth. The wildcard, he said, was OPEC and whether it would cut back supply. If it does, oil prices could hold in the $90 range. If not, he thinks we could be looking at them falling back into the mid-70 dollar range.
Mason Granger, a portfolio manager at Sentry Investments, has a much different view. He says the combination of narrowing differentials between both Canadian crude and WTI and between WTI and Brent and the imminent decision on Keystone XL will lead to “powerful and positive sentiment.” Things are looking just as good for the gas sector, even in the face of its massive rally over the last year or so. “We’ve burned off a lot of the surplus in gas that’s really been the overhang on the sector,” Granger says.
As for their picks, Granger likes – no, loves – Surge Energy (TSE:SGY). The stock stumbled over the last few quarters, as a shuffle at the top combined with missed guidance and operational difficulties put a lot of selling pressure on the company’s shares. But Granger says the elevation of board chair Paul Colborne to the role of president and CEO will be transformative. In addition to his leadership, experience and connections in Calgary, Granger says he comes armed with a plan to turn Surge into “one of the premier dividend paying companies in Western Canada.” It’s also cheap. “The core NAV on this thing at a 2P basis is $8.21, so you’re getting Paul Colborne and a significant discount to the value of those reserves. We don’t see that persisting over time, and I think over the next number of weeks as the plan is articulated by Paul and his management team that this discount evaporates.”
Granger also likes Crescent Point Energy (TSE:CPG), a company of which Paul Colborne just happens to also be chairman of the board. The portfolio of assets the company has been building over the last year – and paying for with frequent equity raises, much to the frustration of some shareholders – give the company “a huge amount of inventory and running room for years to come.”
Finally, Granger likes Canyon Services Group (TSE:FRC), Canada’s fourth-largest pressure pumping company and the one with the newest fleet. It has no debt, cash on the balance sheet and a clear and unfettered focus on Canada. “It’s a very easy story to understand,” he says, “and we think they’re uniquely positioned to capitalize on increasing amounts of capital being spent by super majors and foreign national oil companies in developing the enormous gas resources in the Montney, the deep basin, the Duvernay – all of the emerging plays that are going to be huge in years to come. And they pay you a dividend yield of almost six per cent.”
One of Schachter’s top picks is cash, but there are companies out there that he likes. One of them is Long Run Exploration (TSE:LRE), a former top pick that he still likes on a valuation basis due to the fact that it trades at $36,000 per boe and 3.1 times cash flow. It also has a management team that features former Penn West heavy Bill Andrews, and is operationally focused in the right place, if not quite yet at the right time. “When we start seeing consolidation in the Montney in the future, this company could be one of the ones that’s a target acquisition for a larger entity,” Schachter says.
Schachter also stuck his neck out and picked Niko Resources (TSE:NKO), a stock that’s been absolutely abused by the market over the last couple of years and one that he picked in a previous appearance on Market Call at a substantially higher price. “Niko’s been a challenge for us – and the market,” he said. No kidding. But, as he pointed out, the company’s balance sheet issues have been largely resolved, and it’s trading at a discount to its NAV of $12.83. More importantly, it may be on the verge of seeing much higher prices on its natural gas production in India, as a new contract may be in the offing. “We think that will be in place before the new contract year for them (which is April 1, 2014). If the price of gas goes from $4.20 to $8 or $9, that’s going to materially increase the company’s cash flow.” The market is also assigning no value to its exploration targets – a reasonable thing, given the fact that the company has had no success in drilling them of late. But Schachter sees upside there. “The market is putting zero value on it. We think the portfolio has some very attractive potential.”
Still, Schachter is unapologetically defensive right now. “Having 15 to 20 per cent cash makes a lot of sense.” He’s not alone, either. Apparently Warren Buffett’s Berkshire Hathaway is sitting on a record US$49 billion in cash. As Ambrose Evans-Pritchard noted in an interesting piece for the Telegraph on the disconnect between the expectations of investors and the way they’re deploying their money, that decision by Buffet “speaks for itself.”