Gas is good
Bill Bonner thinks the best is yet to come for natural gas. His favourite way to play it? I'll give you one guess.
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
Natural gas prices may have weakened over the last few weeks in the face of booming American shale production, but Brickburn Asset Management’s Bill Bonner still thinks the best is yet to come for the commodity and the companies that are leveraged to it. “The bears have been right for such a long time it’s about time the bulls got a better shake here – and for good reason,” he said during an appearance on BNN’s Market Call. “The U.S. shale gas plays really did upset the supply apple cart in North America. Huge amounts of new gas came into the market, and justifiably the price fell. But for the first time in a long time we’re feeling more comfortable about the outlook for natural gas. And the shale plays, we’re learning, while they’re great, the only shale play that’s really showing growth is the Marcellus in the northeast. Every other shale play is in decline now.”
Combine that with lower than average storage levels of natural gas, and you have a recipe for a potential price spike. “You can start to build a case for getting excited about what gas prices might do,” Bonner says. “I’m not about to predict the weather, but I think that we’re in a pretty vulnerable spot if we don’t get storage filled up to where it needs to be by the end of injection season.” His favourite way to play this? Painted Pony (TSE:PPY), of course. Everyone should know that story by now – great well economics in the Montney, exposure to LNG and proximity to Petronas’s Progress Energy assets – and Bonner’s certainly a big fan of it. But, he says, there’s also the ever-present prospect of a takeout. “Candidly, they’re in the way of the big guys up there. So I think part of Painted Pony’s story is somebody’s going to want to own those assets once they develop a little bit further.”
He also likes Cequence Energy (TSE:CQE), another gas-weighted company that recently sold off non-core assets to fund the development of its own slice of the Montney play. “Cequence is a name that hasn’t gotten a ton of respect in the market over the last couple of years, but has demonstrated – to us, at least – that it deserves a better multiple than it’s getting.” And with $10 million in cash in the bank and $135 in undrawn credit, he thinks the company’s about to start buckling down. “Get at it, “he says. “I think the results are going to be great.”
Finally, he tapped Petrowest (TSE:PRW), a pick-and-shovel way to play LNG and rising gas prices. “What do they have? They have things that can grade roads, that can mulch the trees that get chopped down in pipeline right of ways…they’re there.” They’re also in a part of B.C. that may be the site of a massive new hydroelectric dam, the proposed Site C project. If that happens, it would mean two multi-billion capital projects happening right in Petrowest’s core operating area.
Over in the Globe and Mail, former Alberta Venture columnist Fabrice Taylor has an interesting piece on the brewing fight at Rocky Mountain Dealerships (TSE:RME) between company management and short-sellers. CEO Matt Campbell, his CFO and some of the bigger funds that hold positions in the company have been buying recently, but there are still 1.3 million shares that have been sold short, or 15 per cent of the total float. That could create a pretty spectacular short squeeze, given that at current trading volumes it would take two months to buy back those shares – and that’s if they were the only buyers, which of course they wouldn’t be.
Still, Taylor is puzzled by the trade itself being made by those who are short RME’s shares. “The only thing I can think of is a pair trade, whereby a fund sells short one stock and uses the proceeds to buy shares in another, somehow-related industry,” he writes. “That way the fund earns a return if the stock it owns does better than the stock it sells short. Even if both go up – or down – it only matters that the long stock does better than the one sold short. The only company I can imagine being the long part of the trade is Cervus Equipment [TSE:CVL].”
Still, he says, that doesn’t make much sense. Yes, he says, Cervus owns the rights to sell brands like John Deere and Bobcat, while Rocky Mountain is largely a Case dealer. But the underperformance of the Case dealerships that Rocky Mountain buys might actually be a strength, given that it’s something that can be improved upon. “Even an extra percentage point or two of gross profit would make a huge difference for Rocky Mountain shareholders,” Taylor says.
And while Cervus is currently the stronger company, it’s also the one facing a battle with the Canada Revenue Agency over its conversion from an LP into a corporation. “There are a number of these challenges unfolding now,” he says, “and I’d rather not bet against a government that’s running deficits and looking for cash. Cervus is a fine company, but the potential damage could be tough on the company’s balance sheet, although it could take months and months to wend its way through the system.” The better bet, he says, is the weaker sister: Rocky Mountain. “Investing at current prices, which I have done, pays you to wait for improving margins, stronger farm sales and for the day short sellers start to cover, which will create enormous demand for the stock. I can easily see a very healthy double-digit return, and I’m happy to collect my dividends along with insiders until that happens.”