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Why natural gas still has upside

Rob Lauzon thinks the story is just getting started - and that investors who should be looking hard at companies that can tell it

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

Mar 14, 2014

by Max Fawcett

There’s been plenty of chatter on the street that the recent strength in natural gas prices is about to wane. With the winter all but over – let’s hope, anyways – and gas entering its shoulder season, some have said prices will moderate . Not Rob Lauzon. He’s the senior portfolio manager for Western Canada with Middlefield Capital, and on BNN yesterday he made a very bullish case for the commodity and its producers. “If we continue to get drought and dry weather on the west coast this summer, all of the utilities there won’t be able to generate much in the way of hydro,” he said. “They’re going to be drawing on natural gas, as well as coal, to produce electricity for the United States. That could be a tailwind for natural gas throughout the summer, at a time when there’s not a lot of gas in storage. We have the lowest amount of gas in storage in a decade, so it’s a very strong pricing environment for natural gas. It may stay at $4.50 all year and trend towards $5 by the end of the year, but we’re not going to see gas, in our opinion, move back to $3 or $3.50.”

In terms of the best ways to play this strength, Lauzon likes three companies. The first is Pine Cliff Energy (TSXV:PNE), which is the product of George Fink, the same person who’s behind Bonterra Energy. And just as he started Bonterra when oil was out of favour in the late 1990s, he started Pine Cliff to play gas when it was out of favour last year. “We think the same way he’s managed Bonterra is how he’ll run Pine Cliff: very low debt, very prudent management.” And unlike a lot of gas companies, which are focused on liquid-rich plays, Pine Cliff is all about the dry gas. “Everyone’s talking about liquids-rich gas, including us, but here’s a play on dry gas. A little higher cost, but nobody’s buying dry gas so they’re getting these properties very cheap.” Lauzon thinks it could be a $2 stock within a year if natural gas prices cooperate, and he’s hoping to see a dividend implemented later this year.

Second up is Kelt Exploration (TSE:KEL), which is also a play on the quality of the company’s management – no surprise, given the bounty they delivered their investors when they sold their last company, Celtic Exploration, to ExxonMobil. “They’re mostly unhedged currently. When you talk to Encana, who’s mostly hedged, they’re supposed to be the smartest people in gas. Well, here’s a company that had the right call on gas and left things unhedged. In certain parts of the last month or so, on a daily basis Kelt was getting over $10 for their gas. I think we’re going to see great cash flow out of this company.”

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Finally, there’s Cequence Energy (TSE:CQE), which Lauzon says is situated on a good postage stamp of land and is drilling good wells in its Willrich and Simonette properties. “If those are successful over the next month or so, that will show that their Simonette [land] has more scale to it. Cequence has been a bit of a laggard in the market, but it’s finally getting a little bit of respect. We think the upside is $3 a share.” The recent investment made by the CPP, which he says means the company won’t have to go back to the market for financing for the forseeable future, is a good sign. “That gave it a very strong stamp of approval.”

 

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