MEDIA / A breathlessly positive article on gas stocks
Mid-term outlook for oil and gas
Business in Calgary magazine, June 1998
There's a specialized little industry niche in Calgary which employs several dozen men and women. They are the oil and gas analysts who occupy the research departments of brokerage houses. And these days it wouldn't be surprising if these analysts were setting up appointments with their optometrists or having technical people check out their spreadsheets. That's because every time they run the numbers, the results come out simply outstanding for the natural gas industry of Western Canada.
It's so good, they're going to have to change the "muzak" on the elevators and the ditties on call-holding to the Rolling Stones classic, Jumping Jack Flash -- "It's a gas, gas, gas ."
And natural gas prices are definitely a gas!
Sure, an oddball asteroid could still ruin everyone's plans, or a real life Godzilla could emerge from the nuclear swamp at Chernobyl and crash the party. But until then, it looks as if prices for Canadian natural gas are climbing off the chart, and with it, the stock prices of select explorers and producers.
In research report after research report, the same comment is being made again and again -- not since deregulation of the natural gas industry in 1986 have things looked so promising for this sector. While you can still get some debate about the future of light oil and heavy oil, there ain't many Jeremiah's out there when it comes to Western Canadian natural gas.
One measure of the industry's health is the number of days a month Peter Linder doesn't see his wife and kids. The oil and gas analyst for CIBC Wood Gundy Securities Inc. in Calgary is on the road a lot these days to Eastern Canada, the United States and Europe telling the natural gas story to individual and institutional investors.
An economist by training and a former Montrealer, Linder and his colleague, Kirk Wilson in Calgary and two others in in the CIBC Wood Gundy office in Toronto, are writing research reports these days with a new flourish of the pen. In a recent report, they state, for example, that "the outlook for gas-weighted producers is somewhere between fantastic and unbelievably fantastic."
Cynics would say that kind of of hyperbole is the norm for brokerages that want to sell stocks to investors. So Peter Linder and the other oil and gas analysts in Calgary are just as pleased to let the facts speak for themselves.
As far as the outlook for natural gas is concerned, CIBC Wood Gundy has already been forced to issue a revision. It originally projected a 1988 price of $1.80/mcf and a year 1999 price of $2.10 /mcf. It now believes that the average for those two years will be $2.00 and $2.30 respectively. These figures are substantially higher than last year and the year ahead looks even more promising as the December 1998/ January 1999 average NYMEX price was recently posted at $2.90/mcf. This means Alberta gas producers today can lock in next year's gas contracts at about $2.50 /mcf, and if they wait, the price could even surpass $3.00/mcf by the end of the year.
The word from Peter Linder is don't wait, that investors should "jump in with both feet today."
The key is to select companies with a good exploration and production program.
"You want to look at companies that have good plays and that possess good technical and management skill. They must be able to show consistent production growth through the drill bit."
High on Linder's list are companies such as Canadian Natural Resources, which he describes as "operationally very strong, with very strong production growth." The stock has been held back by the firm's investment strategy in heavy oil, which has taken a serious hit, but is strong on other fronts. Other good candidates include Berkley Petroleum, Probe Exploration, Pan East Petroleum, and among the smaller companies, Westminster, Bonavista and Canadian Conquest.
In the balmy times of last winter, Gord Currie, an oil and gas analyst with Canaccord Capital, was not terribly impressed with the trends he was seeing in natural gas prices. But that turned around quickly this spring and the native Calgarian sees a very positive outlook for natural gas, driven partly by planned expansions of export pipeline capacity scheduled to come on-stream late in 1998. Another factor is the drawing down of reserves and the need to get more gas into production.
Currie says the natural gas bandwagon started some months ago with investors betting heavily on such favourites as Anderson Exploration and Rio Alto Exploration.
One problem for investors is that there is a "lack of companies that are pure gas producers," says Currie. "The typical company has more oil than gas production." So if you want to benefit from the rising market for natural gas, it becomes a little trickier selecting a company which has just the right profile. One such candidate, in Currie's view, is Newport Resources [sic], which "has gone after some big gas targets this past winter in the foothills."
Over at Research Capital Corporation, David Street has been responsible for oil and gas analysis for a year now, after a 13-year career in the industry, much of it focussed on marketing gas. From that background, Street sees that the deregulation of Alberta's natural gas industry in 1986 has finally come of age an that we are truly part of one huge North American market, with all the risks and opportunities that entails.
Like other analysts, Street was a little surprised at the strength of natural gas prices for his summer. But it seems to be an indicator of the strength of demand for gas, a factor which is rippling throughout North America and may alleviate some earlier projections of an over-supply of gas in the continental market.
At this stage, Street sees "a three to five-year bull market in natural gas with very little downside for the next five years."
At $2.20/mcf at the Alberta plant gate, it's the highest summer prices since deregulation in 1986. Research Capital says that it is not only a function of strong demand, but of lower supply, which in turn has been caused by such factors as increased decline rates for new production and a winter drilling season curtailed by El Nino.
If a stock picker wants to play this bull market in natural gas, he or she will be looking for explorers with good properties and good technical operations.
For David Street, this means looking at companies which are involved in the foothills and the deeper plays. For these and other reasons, some of the firms he favours include Northrock, Canadian 88, and Poco Petroleum.
And while natural gas is all the rage, don't entirely discount oil, say the three analysts interviewed by Business in Calgary.
With prices averaging slightly less than U.S.$16 a barrel so far this year, oil could be poised for a healthy, if not spectacular comeback in the coming months.
"If you look back over two decades, oil has never stayed below $16 a barrel for any established period of time," says Peter Linder of CIBC Wood Gundy. "We believe that in the second half of 1998, oil should average U.S.$17 a barrel."
The story of oil is the classic case of temporary over-supply. And it is worth remembering, says Gord Currie of Canaccord Capital, that oil producers are fairly adept at adjusting production. Oil is easier to turn off and on than gas -- you just crank the handle down and tell the tanker truck to stop coming to the battery. The oil just sits in the ground waiting for better days.
"With lower prices, a lot of companies in Canada and around the world start shutting in and eventually the demand catches up again with supply," says Currie. "And in Alberta, companies start shifting their capital spending more toward gas."
David Street of Research Capital Corporation also has a sanguine view of light oil and believes "we could be through this low price blip within one-half to one year. In the larger picture, light oil is a dwindling resources in the United States and historically, prices don't stay below $18 a barrel for very long."
The same cannot be said for heavy oil, which has been taken out into the back alley and beaten up severely. The consensus view seems to be that heavy oil has a fairly static demand curve and there is limited opportunity to process it into higher grades. With lots of supply and many producers having jumped into or expanded their heavy oil projects, price had to take its lumps.
Patience is the word on heavy oil. And if there are any truly daring contrarians in the crowd, now may be the time to invest as several heavy oil stocks have already been punished by investors. Those who spot the turnaround first and choose the right players may find heavy oil, despite its current malaise, to be a rewarding venture down the road.
Are there any dark clouds? There is one serious issue, according to Peter Linder of CIBC Wood Gundy. "It's the difficulty of an industry maintaining aggressive growth," he says. "Investors should and must accept lower production growth. It's not going to be 20-30 per cent as in the past; 10 per cent growth will be very positive in the future.
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