The Anatomy of an Energy Bull Market

According to Josef Schachter, author of the Schachter Energy Report, Energy Bull Markets start from a period of lackluster action in the sector and then some key metric changes. “In the 1970s it was the launch of Japan as a juggernaut export economy,” he says. “In the 2000-2008 period it was China, industrializing and lifting demand for crude, and exporting some, from 4.2Mb/d to over 11Mb/d.” Currently China’s demand is 12Mb/d and they are importing 8Mb/d of that. In the upcoming cycle Schachter sees India at the margin being the driver of strong incremental demand as its economy evolves from a backwater state to a rapidly industrializing one.

India, with a population of 1.35B people, now consumes between 4.5-4.8Mb/d. As they put more cars and trucks on the road this could grow by the end of the next decade to even more energy usage than China, according to the BP Energy Outlook. “With nearly similar populations this is not out of the realm of possibility,” he says.

“Besides growing demand, the other key driver of the next Energy Bull Market is that the Reserve Life Indices (RLI) of proven reserves are shrinking,” Schachter observes, “as there’s a lack of investment occurring to replace production.” The reserve life index in its most basic definition, measures the length of time it will take to deplete a resource at the current rate of production. In the 1970s proven RLIs were in the 14-16 year range, in the 1999-2008 period they shrank to the 7-9 year level and now they are in the 5-7 year range.

The following chart connects the Reserve Life Indices as they relate to previous Energy Bull Markets.

Energy Bull & Bear Market Cycles August 9, 2018

Decline rates for a lot of companies is over 30% creating a difficult treadmill for them just to keep production up. For companies to replace production, grow future production and lengthen proven RLIs, it will require much more capital and to get access to that capital it will require greater profitability. For higher profits companies need low costs and more importantly, much higher commodity prices.

“For a new Energy Bull Market to emerge, as we believe it will from late this year into 2023 or later,” Schachter says, “it will require WTI to move over US$100/b for a sustainable period and for natural gas to see sustainable prices over $4/mcf for AECO. We see this as very likely,” he adds.

“Energy Bull Markets are wonderful things to experience,” Schachter recalls. He has only experienced two of them in his 40 plus year career. “As we have seen with the bubble, the FANG stocks, and in Canada the marijuana stocks, the lift from bottom to top is a wild and profitable ride.”

Bull Markets in the Energy Sector are few and far between but when they occur they can be extremely rewarding in short periods of time (5-7 years). In the 2000-2008 period the S&P/TSX Energy Index rose from just over 90 to 470 at the high or up 422%.

“Some stocks really outperformed, Schachter mentions, “so if you had invested in great growth stories that did very will with the drill bit, your returns also outperformed.” The following stock went up by 23 times during the period from 1999 to 2008. The stock was not a penny stock but is now heavy weight and largest Canadian producer – Canadian Natural Resources (CNQ-T).

Canadian Natural Resources Ltd.

Source: October 31, 2008

Bonavista Energy Corp.

Source: October 31, 2008

“We were involved in that cycle with star, Centurion Energy, which went from 66 cents in 2002 to a takeover in early 2007 at $12 per share,” recalls Schachter. “During that time window they grew production from 1,000 boe/d to over 30,000 boe/d when they were taken over. DO IT TO ME ONE MORE TIME!”

Some of the companies presenting at Schachter’s ‘Catch the Energy’ conference this fall in Calgary were around during that time and rewarded shareholders very well. Here are just two examples of what could easily happen again in the new Energy Bull Market.

Bonavista Energy went up 13 times from $1.57 to $20.52.

Trindad Drilling went up 24 times from $0.55 per share to over $13.

The ‘Catch the Energy’ Conference, hosted by Josef Schachter on September 29th in Calgary, is showcasing 23 companies. CEOs or top executives are making presentations, sharing their growth stories and future plans for investors. All these companies have attractive opportunities according to Schachter, either domestic or internationally, either large cap or smaller cap and either producer or service. “You’ll have an opportunity to meet with these execs,” says Schachter, “and ask questions either in the presentation rooms or the company booths in the Exhibit Hall. Come join us!”

Come on out and find your home run stocks for the upcoming new Energy Bull Market.

Trinidad Drilling Ltd.

Source: October 31, 2008

Josef Schachter, CFA, is the author of the newsletter “Schachter Energy Report” and is a frequent/regular guest on BNN Bloomberg, Michael Campbell’s ‘Money Talks’ radio show, and the World Outlook Financial Conference. For more information about the conference, please see