Gas-weighted names are blowing up
Why Crew Energy and Painted Pony are up big on the day - and why there's probably more to come
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 firstname.lastname@example.org
by Max Fawcett
Remember when companies with significant exposure to natural gas – or, worse, pure plays on the commodity – were the dogs of the energy sector? Yeah, me neither. The sector has been surging so far in 2014 largely on the basis of rising natural gas prices, and a few of the names in it found another gear this morning after Crew Energy (TSE:CR) unloaded most of its oil assets in the Cardium and added $105 million worth of gas assets to its Montney acreage. AltaCorp’s Jeremy McCrea likes the strategic shift, and thinks it’s on the verge of becoming a pure-play Montney name – and a premium one at that. “With proximity to the west coast, it’s highly likely Crew begins seeing an LNG M&A premium come sooner than later. In addition, it’s very important to note how producers continue to push the limits on new completion techniques which have dramatically improved economics and paybacks for these players (from 2.5 years to 12 months). As a result, Crew is expected to show CFPS growth of 20 per cent and 30 per cent for 2014 and 2015. The combination of a multiple expansion to 7.5-times, above average CFPS growth and near-term catalysts, Crew is very likely to be one of the top performing names this year.” McCrea bumped his price target up from $12 to $15, and even with today’s furious rally in Crew shares that’s still a near 50 per cent upside.
Painted Pony Petroleum (TSE:PPY) also saw a significant re-rating from McCrea after it announced it was increasing its annual production estimates for 2014 in light of better than expected well results. Those results are a product of the company’s new open-hole, ball-drop technique, and they portend all kinds of upside if they prove to be the rule rather than an exception. And with more than 2,000 potential drilling locations on over 203 Montney sections, the company has plenty of room to run with this new technique and the substantially improved well economics they portend. “We suspect that as the company accumulates further data on these recently-drilled wells, combined with a clearer gas price environment, we could see cap-ex/production increase meaningfully into H2/14 (and into 2015).” Painted Pony has long been seen as a takeover in waiting, but it may well be that the better path to value (and profit) for investors is by simply drilling up the inventory. For what it’s worth, McCrea bumped his price target up to $14 per share from $11.
And speaking of natural gas, The Energy Report has an interesting interview with Bill Powers, an independent analyst and the author of “Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth,” a recent book that takes issue with the notion that North America is awash in natural gas. As he told The Energy Report, “several of the predictions I made in the book have come true since the book hit the shelves in July. First, we’ve seen numerous shale plays head into decline. We’ve seen big declines from the Haynesville as well as the Barnett. The Fayetteville is in decline; there have been further declines in the Gulf of Mexico and Wyoming. But what has really changed is the North American natural gas market has become extremely unbalanced, which was what I had predicted would come to pass sometime in the 2013–2015 time frame.”
He thinks the worst – or best – is yet to come. “We should see storage fall well below last year’s end-of-winter low. We are more than 500 billion cubic feet below last year’s levels. This would put us at a very low level of storage at the end of the winter heating season. I believe this will push prices somewhere between $5 to $7/MMBtu later this year. Then we will see a consistent march higher over the next two to three years and we will see spikes, depending on the weather. How high prices go will depend on the severity of it.”
There’s a lot more in that interview, and it’s well worth a read – particularly if you’re thinking of investing in Alberta-based gas-weighted companies.