Calling a bottom in natural gas? This past Friday, August 21, 2009, natural gas futures were trading below $3.00 in New York – compared to oil futures hitting the year’s high above $74. Some analysts have even been speculating that natural gas could go down to zero, given the enormity of current oversupply and overproduction.
Last week BNN spoke with two energy stock analysts for their take on the current state of the natural gas industry. Here’s a brief recap of conversations and recommendations given by John Stephenson, portfolio manager at First Asset Funds, and Aaron Fennell, Senior Market Strategist at Lind-Waldock.
Missed The Market Bottom? Natural Gas Might Be Your Second Chance
Take a look at any natural gas chart or chart of a company heavily into gas and you’ll see the extent to which values haven’t caught up with the rest of the rally since March. Worse, natural gas prices have sunk even lower. Apparently, most of the speculative money that’s been betting on an infrastructure recovery and growth in China has gone directly into oil. As a result, notes Fennell, not a lot of speculative capital has flown back into natural gas yet.
So natural gas could be your opportunity to lock in some good upside with the right company.
Who’s Bullish On Natural Gas
Right now, Fennell is buying gas and shorting oil. Here are the reasons Fennell is bullish on natural gas right now:
1. When compared with oil in terms of equivalent energy units (BTUs), natural gas is trading at only 25% of the price as crude oil. Historically this is almost unprecedented and hasn’t been seen in the last decade.
2. At some point soon, producers will probably stop pulling gas out of the ground. This will put a floor under the prices.
3. There’s been less consumption due to the recession, but this won’t last forever.
4. There’s much more room still for investment capital to flow into natural gas (the opportunity hasn’t been seized on yet).
One upside to the low gas prices, though, is that it makes it easier for Canada’s oil sands producers, since they will use natural gas to help process oil from the tar sands, keeping costs low on their operations.
Who’s Bearish On Natural Gas
John Stephenson thinks gas is in such a problem state right now that “it’s going to a place where there won’t be any bids.” He doesn’t like current natural gas fundamentals for several reasons:
1. We’re in hurricane season, and weather affects 80% of the variance in natural gas prices.
2. Natural gas is the most volatile commodity.
3. Natural gas volatility can’t be predicted; most of it is based on weather patterns.
4. There’s too much production in the industry right now.
5. There’s too much supply sitting around right now.
6. The market is in contango at the moment.
Stephenson actually thinks natural gas prices won’t recover at least until 2011.
Canadian Energy Stock Updates And Recommendations
Here are just a few pieces of feedback Stephenson gave on some Canadian energy stocks.
Banker’s Petroleum (BNK)
-they’re producing 6400 barrels/day
-scheduled to rise to 8200 barrels/day end of year
-heavy oil play in Albania
-aggressive drilling program for their size
-he likes them, an interesting space
Canadian Oil Sands Trust (COS.UN)
-not a great dividend, but was raised recently
-directly leveraged on oil prices
-hold it
Arc Energy Trust (AET.UN)
-conservative company
-very well-managed trust
-he owns it
-recommends holding
Paramount Energy Trust (PMT.UN)
-mostly a shallow gas play
-gas prices have gone from bad to worse
-there could be a distribution cut here
Total S.A. (ADR)
-an integrated oil company *not based in North America*
-seems to have reasonable growth
-other super majors only control 3% of world’s reserves, most have little to no growth left (eg., Chevron, Exxon, Conoco)
In general, Stephenson notes that people involved in conventional gas are going to be stuck; those in unconventional gas – like Encana – will be in good shape going ahead. And Encana does unconventional gas very well.
If you liked this post, why not subscribe to my blog for free updates and get these delivered right to your reader or by email? Also, feel free to connect with me on Twitter.
Related Posts - What You Need To Know About Shale Gas Investing and the Pros and Cons of Fracking
- Bullish on Nat Gas? Check Out These Canadian Natural Gas Stocks and ETFs
- The Awesome Power of Income Trusts
- Best Way To Invest in India - A Pure Play India ETF
- Deciding Whether You Should Invest In Suncor (SU) or Canadian Oil Sands (COS.UN)
Related Articles From Other Websites
{ 3 comments… read them below or add one }
Glad I made this blog a normal stop.
Decent argument on both sides, but I might have to fall more on the bullish side. Once production drops and/or demand raises you may have missed a buying opportunity.
Yes – I’m invested in a couple of companies that are about 50% gas-weighted, and it’s reflecting in their share price. Good thing though is that cheap nat gas helps oil sands producers, so they become more profitable short-term. So it’s an interesting symbiotic play!
Please supply me Daily opening price per share ,miday and market closing price. Thank You