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Josef Schachter to investors: raise some cash

Also: details about Encana's royalty spin-off create interest - and maybe some momentum

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 mfawcett@albertaventure.com

Apr 16, 2014

by Max Fawcett

Josef Schachter, the brains behind Schachter Asset Management, thinks it’s time for energy investors to take some money off the table. After a strong run to start the year, he says raising some cash for the inevitable swing back down might be prudent. “We can have 20 to 30 per cent corrections in the sector if you take $20 off the price of oil,” he said during an appearance on BNN last week. “So, from my point of view, you want to be more defensive if you’re over-weighted, if you own some high cost companies, companies with big balance sheet problems with lots of debt or companies with a high dividend yield payout where a $20 erosion in the price of oil could hurt their cash flows.”

When it does come time to deploy that cash, he thinks a good place to do it will be in the natural gas sector. “We’re going to have a very tight situation when we get into the fall. If we have a normal winter, we should get through it and we’ll have $5 NYMEX and AECO. But if we have another cold winter, we could see spikes up to $7 and $8, which is what we saw in 2003/04.” He suggested that investors look to spend in Q3 or Q4 later this year. “The oily guys will still do well, but the margin improvement will be showing up on the natural gas stocks.”

In addition to increasing their cash weighting, Schachter had two other top picks for investors. The first was Sterling Resources (TSXV:SLG), a company that has gas assets in the U.K. and has some untapped reserves off the coast of Romania. And while it traded for as much as $4.50 in 2011, it’s now down well below a dollar. That’s a buying opportunity, Shachter said, particularly given the fact that the field that got investors so excited three years ago only came on in Q4 2013. “They should be doing about 7,000 boe/d by the third quarter of next year, and generating 40 cents of cash flow. So it trades at 1.5 times Q315’s cash flow. Plus they still have the properties in Romania that the market’s not paying for.” He has a price target of $1.60 on its shares.

He also liked Long Run Exploration (TSE:LRE), a company whose production is more or less equally divided between oil assets in Redwater and gas in the Montney. More importantly, it appears to have found the operational and financial balance needed to maintain a dividend and grow its production on those assets. It raised its dividend recently, and he thinks that could happen again in 2015, along with a production increase to 34,000 boe/d (it’s currently cranking out 26,300 boe/d). He has an $8 dollar price target on its shares.

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Meanwhile, Encana gave the market some colour on its plan to spin off its Clearwater royalty assets in southern Alberta into a new company. That company will be called PrairieSky, and it could be worth as much as $4 billion – double some of the earliest estimates by analysts. And as BNN’s Jameson Berkow noted, it should be self-funding from the get-go. “The new company is also not expected to spend any of its own money on exploration or development, unlike Freehold Royalties, which had previously been cast as the currently operating model PrairieSky would most likely copy,” he wrote. “By farming out the actual production work to third parties, PrairieSky will need only to sit back, collect its royalties and in term disperse them to income-hungry investors.” Given that, and the market’s apparent interest in paying for that income, it appears the turnaround at Encana might be picking up some speed.

 

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