SFY Among Barrons Cheapest Gas Companies
Rhonda Brammer had a piece on NG and some small/mid cap gas stocks in this week's Barrons. Here are some exerpts:
<<But, paradox of paradoxes, the spectacular rise in the price of the product has failed to light a real fire under natural-gas stocks, especially small ones. How come?
Well, quite simply, investors don't believe what they see and are dead certain -- as they have been all the way up -- that the next move in gas prices will be down, and, likely, significantly down. The price of oil has already cracked, falling from the mid-30s to 26 and change on Friday. So, they reason, why own shares of companies in a boom-bust industry with prices at the peak?
Here's why: Because gas isn't oil and if its price falls -- and it eventually will -- the odds are it won't fall as soon or as far as the Street expects. And even at $5, $4 or $3.50 an mcf, many of these neglected companies are veritable cash
machines.
At last reckoning, gas in storage amounted to 2.098 trillion cubic feet (tcf), a worrisome 20% below where it was this time of year. And winter has just begun. ...
And if we use no more gas this winter than last-a big if, given what the weather has been of late-inventory levels will still be drawn down so low that adequately replenishing them during the summer stacks up as a very tall order.
The bottom line: Natural gas will be tight for at least a year -- conceivably longer.
The price of gas next year will average a minimum of $4 an mcf, reckons Art Smith of John S. Herold Inc. And because of the huge drawdowns in inventory, he thinks it could be at or above $4 in 2002. ...
Another sharp investor we know, who has made a bundle in energy stocks (but, alas, is publicity-shy and asked that his name not be used), thinks gas will average closer to $5 in 2001. What's more, he's convinced he'll continue to turn
a handsome profit whether or not Wall Street ever learns to love natural gas.
The reason boils down to the happy presence of what he calls "real cash" and "real users" eager to snatch up supplies of the increasingly precious fuel. By way of example, our anonymous friend points to San Jose-based Calpine Corp., a builder of power plants that recently bought Calgary-based TriGas to lock in gas supplies. TriGas shares jumped nearly 30% on the announcement.
"If you're sitting there with a huge generating plant," he explains drily, "it's a
good idea to have some gas to run it." And the economics of acquiring
depressed companies is compelling. "You can buy these things, sell forward
production and pay them off in three or four years, and keep what's left."
He sees busier acquisition activity in Canada than in the U.S. and finds valuations there more compelling. Three names he believes could appreciate 50% in the next year: Berkley Petroleum, Anderson Exploration and Petromet.
In brief, natural gas appears almost a win-win proposition. If gas stocks don't move up, the companies become extremely attractive to larger firms looking to put some of their plentiful cash flow to work. These days it's often cheaper to buy -- and sometimes a heap cheaper -- than to drill.
So, which of the smaller exploration and production companies, both here and in Canada, have the cheapest gas? The answer, according to Smith and the folks at Herold, is in the table.
The size of these companies, as measured by their enterprise value -- which is
basically their stock-market capitalization plus their net debt -- ranges from just over $200 million to almost $3.5 billion. To qualify for the list, a company's mix must be more than 40% gas, though many are 70%-100%.
The folks at Herold calculated a firm's enterprise value (adjusting for non-reserve assets) and then divided it by proven reserves at the end of last year. (Each barrel of oil was counted as six mcfs of gas.)
The companies are ranked by the price an investor buying their stock is paying for their reserves of natural gas, the cheapest first. Seven on the roster show reserves valued at less than $1 an mcf. The cheapest statistically: Numac, Pioneer, Evergreen, Bellwether, Berkley, EEX and Cabot. None of the outfits owns gas valued at more than $2 an mcf.
That these figures are conservatively stated is evidenced by the fact that reserve estimates for this year are -- because of price alone -- likely to be much higher across the board.
Some of Smith's favorites:
Pioneer Natural, the old Mesa and Parker & Parsley, has some "terrific" gas fields. It boasts rapidly improving finances and "the prospect for impressive production growth," and it sells at six times next year's estimated cash flow.
Ocean Energy, which merged last year with Seagull, is also getting a handle on its debt, lays claim to some "great assets in the Gulf" and goes for 4.5 times estimated 2001 cash flow.
Smith is keen on Noble Affiliates (at less than five times next year's projected
cash flow). ...
In Canada, Smith's two favorites just happen to be two of those named by our anonymous friend: Anderson and Berkley.
The former is run by "J.C. Anderson, a crusty oil man" who, in Smith's view, "has built a terrific company." He has been an astute acquirer, "very sharp on his timing." The gas, all of it in western Canada, "represents great value." The stock sells for only 4.1 times next year's estimated cash flow....
I cannot reproduce the table, but SFY was ranked 27 of 30 based on the price of their NG reserves. Dunno if an adjustment was made for gas in captive markets like NZ. |
