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On LNG, the clock is ticking

Also: Rob Lauzon talks up three Alberta names

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

May 23, 2014

by Max Fawcett

On Wednesday, China and Russia reached a $400 billion, 30-year deal that will see Gazprom supply at least 1.3 trillion cubic feet of natural gas to China annually, and build $55 billion worth of pipelines, processing plants and other related infrastructure to get the gas out of Siberia and send it south. And while the deal is obviously worrisome to European countries, who depend on Gazprom for more than a quarter of their annual gas consumption, it should also raise a few eyebrows in Canada. According to the Calgary Herald’s Deborah Yedlin, “this turns up the heat on both Canada and the United States, as both countries vie to supply the growing Asian markets with natural gas, and raises the question of what this means for the pricing power with respect to long-term LNG contracts from both Canada and the U.S.” It also raises questions about the value of companies that have that gas in Canada, and stand to benefit from any buildout of LNG export capacity.

But, Yedlin noted, it’s not a fatal blow to those hopes. “One reason this week’s deal doesn’t spell the end of China as an LNG customer for North American suppliers is simply that its consumption of natural gas continues to grow. Where it was consuming just under 30 billion cubic feet per year in 2000, it’s over 170 billion cubic metres today and not expected to slow down.” Still, the clock is clearly ticking, and Canada appears to be getting passed by other global competitors.

Meanwhile, Rob Lauzon, the managing director for Western Canada for Middlefield Funds, took his turn in the Market Call chair earlier this week and came with a few interesting names. First up was Cequence Energy (TSE:CQE), a name he’s liked before and one with plenty of exposure to liquids-rich gas assets in two interesting plays. “I look at it as a great real-estate play,” Lauzon said. “They’re in the Simonette-Montney play, [where] they’ve got 200 or so sections which gives them lots of drilling inventory and very prolific wells. And then more recently, on top of that, they’ve been drilling (with their joint-venture partner Bonavista) some great Willrich wells.” After a recent run past $3, it’s come back some, and he thinks the time is right to buy – or add to your position. “It’s pulled back enough here that I think it’s a great entry point – again.”

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He also liked CWC Well Services (TSE:CWC), which recently acquired Ironhand Drilling (a company that had blue-chip customers like Tourmaline, Progress Energy and Vermilion) to diversify the company and the products it can offer. It also is paying out a yield that’s much more generous than the average energy service company, and Lauzon thinks that’s sustainable. And, there’s still upside. “We’re getting most of our expected total return in dividends, but with the activity we’re seeing in the Canadian Western Basin and seeing that activity picking up, we think EBITDA and cash flow growth on this company could be substantial over the next few years.” For more on the company, check out this profile that our sister magazine Alberta Oil produced earlier this year.

Finally, there’s Paramount Resources (TSE:POU), a company whose shares have rallied hard of late but one that Lauzon thinks still has plenty of room to run. The price of its shares, he said, already have approximately $10 built into them because of their stakes in Cavalier Energy and Fox Drilling, which means the core business is worth $45. And given the fact that it could grow its production from 45,000 to 75,000 barrels of oil equivalent by the end of 2015, Lauzon thinks that’s a pretty tame valuation. “When you look at 2015 numbers, the value is reasonable.”

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