Canada’s Winning Lottery Ticket Part II: Opportunities in Energy

Posted by Joseph Schachter & Michael Campbell

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Michael Campbell: The market is anticipating some problems so oil traded at $106 on Friday, yet you say the fair market value is $70. Are you suggesting locking in some of the profits, raising some cash, reduce risk and exposure so you have some cash to reinvest again on a correction?

Opportunities in Energy


Read Part I of Michael Campbell’s interview with Joseph Schachter HERE

Michael Campbell: Joseph Schachter of  Schachter Asset Management is with me, and we’re talking the energy markets. Joseph, worries about the domino effect, worries about problems in the Mid East expanding into something serous, like Algeria you mentioned, Iran, Iraq, etcetera. The market is anticipating some problems so oil traded at $106 on Friday, yet you say the fair market value is $70.  Does that render virtually all the stocks speculative at this point? What should we look for and have on our radar screen, maybe some opportunities if we get a price to climb?

Joseph Schachter: Yes, I think that the market is discounting to some extent these higher prices; maybe not $106 but definitely more than fair value. So I think that we’ve had a decent move in the oil and gas sector in Canada. The natural gas stocks deserve it because the long term commodity price for natural gas has to be more like $5 or $6 to justify new capacity, and the natural gas stocks like Delphi  Energy is one of the names, we talked about it at the conference, the stock at the time was trading just over $2, it’s gone up over 20% just a month since the conference.

There’s been some very good moves in the natural gas stocks, which is justified because the natural gas price was way undervalued relative to commodity prices, while  some of the oil stocks have gone up a little bit more because of Japan and also the new money coming in at the beginning of the year from pension funds and RSP’s etcetera. But the stocks probably are vulnerable on the downside, especially the oil names.Potentially the most downside is probably in the tar sands names because these guys have a cost structure that keeps on going up so if you take $20, $30 off the price of oil, their margin for profitability goes down. Tar Sands names are probably the stocks that are most vulnerable at this time.

Michael: Many Energy names you mentioned at the conference just over a month ago have done really nicely, so are you suggesting locking in some of the profits, raising some cash, reduce risk and exposure so you have some cash to reinvest again?

Joseph: Right, and again each person should sit down with their investment advisor and decide what is appropriate for them. Depending on  own risk tolerance you may want 10% cash reserves,  or  a trader may want to see the 20 or 25% cash reserves to take advantage of it. The resource sector has done very well in the last six months, take some of the profits off the table and sit there with the cash in your portfolio waiting to able to take advantage of some of the bargains because a couple of times a year we always shake outs. Take advantage of them rather than being frightened of them, The reality is you should sell when the euphoria is on, and we’ve got a lot of sentiment indicators that  indicate you want to go to the sidelines. One indicator has the  S&P is sitting at over 80% bullish, On the TSX, all of these sentiment indicators are near the extreme. When they get below 20% that’s usually bullish, and interestingly in Q1 of 2009 we had 0% bulls on the Dow and the S&P 500. Now that we’re speaking the high 80s, we’re way up.

In a second sentiment indicator, insider selling is now at record levels, it’s like three sales for every buy. When you go back to the first quarter of 2009, we were probably one to one, so usually when you get two to one it’s usual a warning signal; when you get to three to one, which is almost a record level, that tells you that the insider is saying the best that’s happened is here, our stocks have done really well, we’re taking some of our money off the table. That should be a warning for most investors out there when the insiders begin to sell at that kind of a level.

Michael: Do you have a couple of names of senior Energy Stocks that we should put on the list?

Joseph: On large cap weakness, again this thing may take a couple of months to unfold in terms of the correction, but Canadian Natural Resources, Talisman Energy, Niko Resources are large cap names that we think you want to own in your portfolio for the long term.

Michael: And what about the oil sands stocks like Suncor or any others?

Joseph: Suncor is an attractive name, but I like Canadian Natural Resources better because I think CNQ has got exposure to the tar sands, exposure to heavy oil and they also have their balance sheet getting very strong again because they’re paying down debt after the major construction cycle that they’ve had up north. Once their balance sheet gets in order they will be then ready to start growing again with acquisitions, and they have been a very good and astute investor buying companies at the right time and they have added materially. So they have a very strong Western Canadian base inconventional, they have a big position in tar sands, and they already have opportunities overseas but that part of it is the smallest part of the business.  The International could expand materially which would make it one of the real classic investment oil and gas companies in the country.

Michael: Let‘s talk mid tier for a second.

Joseph: In the mid tier companies in that 300 to 500 million.dollar rang we’ve liked Delphi Energy, we like Galleon Energy, we like Orion Oil and Gas, we like Vero Energy. Again, buy them on weakness, the stocks have done well in the last couple of months so wait till things quite down during the period of disruption in the market.

Michael: And the environment for juniors?

Joseph: The juniors are where you want to go for the exploration stories, companies that are drilling high impact wells and if they’re successful the company can have a material change in it valuation.We like companies like Sea Dragon, Western Zagros, Forent Energy, and Vulcab Mineral. Names like that that are involve either in Canada or internationally.These guys have either joint ventures or they’re dealing with other large companies,so any success with the drill bit could mean material difference to investors and we’ve seen that happen in the past with many companies, Centurion Energy for example was in Egypt, and that company went from $0.66 to a $12 takeover by Dana Gas. So those are the kinds of stories you want to be involved in, but it’s a patience game. When you buy into this you want to own them and keep three to five year time horizon.

Michael: Great as always Joseph, we really appreciate you making the time for us here and across the country on The Chorus Network. We look forward to talking to you again in the near future Joseph.

Joseph: My pleasure.

Interview with Joseph Schachter, Schachter Asset Management. L