Natural gas strength – here to stay?
Also: a large-cap pick from the small-cap focused President's Club newsletter
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 email@example.com
by Max Fawcett
You can add Chris Theal’s name to the growing list of people who think the recent strength in natural gas prices is more of a long-term trend than a short-term aberration. The president and CEO of Kootenay Capital was on BNN yesterday, and he outlined why he’s bullish on gas. “I think since the start of winter we’ve seen about $8 billion added to producer cash flows. It’s a very robust environment, and I think coming out of the quarter what we’re seeing is a very sustainable move higher in the natural gas quote for the balance of 2014.” Those rising cash flows, he says, mean one of the best ways to play the trend is through the service companies. “I really think the leverage in the sector for the balance of the year is going to come from the natural gas producers and the oilfield services segment. What I’m seeing right now is a lot of work is going to get carried over into the summer as we get into spring breakup. I do think the pendulum of economic rent is about to shift back in favour of the service companies, and that speaks to pricing power and margin expansion in the back half of the year.”
In terms of specific names, Theal likes Trican Well Service (TSE: TCW). “I think amongst the three pressure pumpers in Canada, it’s had the weakest EBITDA contribution for the last several quarters,” he says. “I think there’s been a lot of streamlining of the cost base in Trican, and I think Russia has sent some noise into that situation as we see things evolving in Ukraine. But fundamentally, as I think as we get into the second half of the year, pressure pumping is going to be a real point of tightness in the market. And what I look for at this point in the cycle is those that offer the maximum operating leverage to pricing power.” He notes that the company’s Russian unit contributes 10 per cent to the company’s EBITDA, but he thinks it’s “relatively shielded” from the current geopolitical turmoil in the region.
He also likes Great Prairie Energy Services, a company that went public in September in an offering that his firm participated in. It’s in the business of fluid handling and rentals in Kindersley, Saskatchewan, the hub of the Viking play, and he says it could easily expand into the Shaunavon and the Bakken. “I think with the blue chip customers that they do have there’s just lots of visibility on the growth profile for what’s a fairly small company – only a $30 million market cap. And the valuation’s very attractive – it’s about three-times EV/EBITDA [enterprise value/EBITDA] with no debt.”
Meanwhile, the President’s Club newsletter, which tends to focus on under-the-radar small-cap companies, released a positive report on Capital Power (TSE:CPX). And while it’s a lower-reward proposition than most of the newsletter’s recommendations (one of which, Neulion, just popped by nearly 100 per cent over the last week) it also comes with a lower risk profile. “Don’t expect this stock to make you rich,” Fabrice Taylor, the newsletter’s author, writes. “But it’s a nice stable dividend payer with a modest amount of capital appreciation to boot.”
Why Capital Power? He thinks the stock is being discounted by the market, and that this is about to change. “Capital Power made an ill-timed foray into the New England market and had to beat a hasty retreat, taking a small loss in the process. That helps explain why the stock trades at a big discount to the peer group. We think that discount will close as the New England issue is put to rest and as investors focus on Shepard and other projects.” Those projects include the 105 MW Port Dover & Nanticoke wind project in Ontario, which was just commissioned and came in under budget, the Genesee 4 and 5 plants near Edmonton, which will have combined capacity of 1,050 MW (of which Capital Power will get 525 under the terms of its joint venture with Enmax) that will be online in three or four years and the K2 wind plant in Ontario, a three-way joint venture that adds 90 MWs of output to CPX’s lineup. “This is a bigger company,” Taylor writes, “so analysts have a bigger impact on investor sentiment (especially institutional sentiment) than with smaller names. We studied the most research reports and it’s obvious that analyst sentiment is starting to turn. We therefore think we’ll see renewed investor interest in the name.”