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The gas trade: not over yet

Also: Joanne Hruska's three favourite names in the oil and gas sector

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

Jul 17, 2014

by Max Fawcett

Natural gas-weighted names are getting whacked around again today, but a report from Raymond James analyst Kurt Molnar argues that the bullish trade on the commodity is far from over. As Jonathan Ratner reported in the Financial Post today, Molnar’s brief argues that the recent weakness in natural gas prices is more about profit taking and relatively cool weather than any fundamental problems in the supply and demand relationship. And he thinks it’s an opportunity for investors who still want to participate in the trade but thought they’d missed their entry point. That’s particularly true of Canadian names, where above-average storage injection in the U.S. and below-average injection in Canada could narrow the spread between AECO and Henry Hub – or reverse it entirely.

The Canadian gas market is the tightest in North America. U.S. storage has been refilling at record rates, but Canadian storage is refilling at lower-than-average rates while demand is setting new daily consumption records. Mr. Molnar noted this dynamic has helped shrink AECO/Henry Hub price spreads, a trend he sees continuing. He’s convinced AECO can move to a premium to Henry Hub in the coming months. And, of course, no matter how much gas gets injected over the rest of the summer, another record cold winter could send prices soaring. “If North America experiences a normal winter this year, the analyst thinks a starting inventory number above 3,500 bcf should keep gas prices between US$3.50 and US$4.50,” Ratner writes. “However, if the weather is unusually cold like last year, he believes 3,500 bcf ‘is a dangerous starting point for natural gas storage’ this winter.”

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Joanne Hruska, a vice-president and portfolio manager at Aston Hill Financial, certainly seems to buy into this thesis. On her latest appearance on Market Call Tonight, she tapped three gas-weighted (well, two-gas weighted and one 50-50 split) names as her top picks. First up was Bonavista Energy, a company that’s struggled lately but might be due for a bounce. “The knock on the stock in recent years was that its debt was getting up there, and there were some management changes,” she said. “But we think that even though they have a fair amount of their gas production hedged, they’ve really made their operations much more efficient. We think the valuation is among the lower end of similar-yielding former trusts, and we think it’s going to be a good few years.”

She also liked Crew Energy (TSE:CR), a company that she thinks looks an awful lot like Progress Energy in its earlier days. “The valuation still isn’t bad, even though you can see by the chart that it’s gone up a bit. I think of them as a mini-Progress. They also have some oil production in northeast BC that’s early-stage as well.” She rounded out her top picks with Long Run Exploration (TSE:LRE), a company that’s split fairly evenly between gas and oil and liquids production and is, in her opinion, substantially undervalued. “Long Run is probably the cheapest yield name in the space for similarly-sized companies. They’ve just made a couple of acquisitions that expand their plays – they were stuck in these plays that we good but didn’t have huge amounts of visibility – so I think you’re going to see some good things come out of Long Run. They have not participated in the downdraft in the last couple of weeks that everyone else has, and I think it’s just because people know it’s so cheap. That’s why we’ve bought some more recently.”

And, for those who might think the energy sector’s already made its move for 2014? She thinks there’s still lots of upside to come – and her firm has been buying in the last couple of weeks to try and capture it. “The Canadian energy sector has definitely lagged behind, even though we’ve seen a great run here. You have to remember that oil and gas stocks have been weak since 2008.”

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