Five North American Natural Gas Buys

Five large cap buy recommendations concentrated on North American natural gas, Anadarko Petroleum (APC), Devon Energy (DVN), Encana (ECA), EOG Resources (EOG) and XTO Energy (XTO), have demonstrated volume growth on a basis that takes account of financing (see chart Volume per Share, Adjusted for Debt and Dividends, below). All have low McDep Ratios ranging from 0.72 to 0.91 with the top growers of the latest quarter coincidentally having the higher McDep Ratios.

Stock prices are in an uptrend by the 200-day average measure despite intense short-term pressure on the price of the companies’ main product, clean natural gas. Potentially rebounding economic activity in 2010 may demand the new volumes not needed today for industrial production or power generation. The large cap North American natural gas independents account for 5 of our 28 buy recommendations. We suggest that one or more might account for 18% of enterprise value in a McDep Energy Portfolio, or perhaps 24% if you like the prospects for natural gas as much as we do.

Since the most recent quarterly disclosures, we have modified our volume measurement technique to smooth the debt factor and to include an adjustment for income. As in the past, the share adjustment gives credit for share repurchase or assesses a cost for issuing new shares. The debt adjustment neutralizes the appearance of growth that may be financed with borrowed funds. Our current method takes incremental debt in a quarter and assumes that it is replaced by a corresponding amount of shares issued at Net Present Value (NPV). As a result, the latest change in NPV affects only the latest increment of debt, not the embedded base. The dividend adjustment, also added since the quarterly disclosures, will become meaningful when comparing low dividend paying independent producers with income stocks.

Meanwhile, the 40-week average for six-year oil has turned up this month to $71. An uptrend can appear stronger when the average itself is moving up in addition to latest price being above the average. Latest settlement prices for the average of futures for the next six years are $83 a barrel and $6.71 a million btu. Natural gas is just under the 40-week average of $6.89. Our five large cap independent natural gas buys are positioned to weather the next few months of potential short-term commodity pressure and to participate in the possible upside thereafter.

Originally published on August 11, 2009.

Comments

[HumbleAlpha:]

Not catching falling knives in Nat Gas. But when a little upturn starts I agree with DB analyst that XCO and CHK are top names to focus on

Sep 04 09:10 AM

[AndrewBaker:]

ATPG: a four-bagger this year already, and a lot left to go.

Sep 04 01:54 PM

[Steven Ward:]

Buy NG when the vast majority of the NG Bulls throw in the towel. They need to get crushed, like the pricing of NG. Then have patience for about 18 months to two years.

Sep 05 11:51 AM

[ALEJO1UR2:]

Buy NG when Mr. Obama decides to take strong standings on more facilities to increase consumption of more natural gas in cars, power plants and industries in certain regions of the country. But the oil Co. won't like it.

Sep 05 01:44 PM

[opie and ta...:]

I don't know much of how this etf works. I do know grafs and technical indicators and for the short term,{very short for tuesday} if the stock will open higher buy @ the open and set a stop @ 8.75. If the futures open lower wait till 9:00 and make an entry. After that I will have to look @ the indicators to see if it will remain to the upside or continue to fall. If it does continue up watch 3 to 5 days to drop off and test previous lows.

Sep 06 01:28 AM

[c5966:]

As I tend to be rather debt averse, when it comes to investing in common shares, none of these companies appeal to me.

Relative to the cash on their current balance sheets, these companies are quite debt heavy. Instead of the energy business, they all seem to be in the debt-financing business.

Sep 06 02:26 AM

[najdorf:]

It's funny that companies with years and years of reserves in the ground get valued exuberantly when NG is at 13 and pitifully when NG is at 3, almost within a year of one another. NG is a better fuel than oil in terms of pollution, accessibility and now cost. Do you really think NG demand isn't going to be up again next year or the year after? Companies would have to be crazy not to be developing ways to better store and use $3 NG while oil is at $70. It's not like there's going to be a magical point when NG sells at $1 and ECA stock is also at $1 and you can buy it with no risk...everyone else is looking for the cheap entry point too and it won't be there. You're not going to get better deals than March's for a long, long time. Try to look at DCF or PE/10 rather than the next year's earnings.

Specifically on ECA, the one I know, debt is under control and the company is good at hedging. Pretty solid investment here although I'd prefer to add in the 40s.

Sep 06 02:48 AM

[Jake2:]

"Potentially rebounding economic activity in 2010 may demand the
the new volumes not needed today for industrial production or power generation." Wow! Is this "woulda shoulda coulda" or what? Reader, pass by.

Sep 07 02:08 AM

[receipt:]

Long Natural Gas = Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (HZBBF)!

Sep 09 08:59 AM

[Mr. Man:]

DPTR is hot.

Sep 10 07:09 AM

[coldcall:]

Theres no way the Canadian or US governments would allow domestic nat gas businesses to fail completely (on masse). Nat gas is a *strategic* resource remember. At some stage we'll need more production and if one allowed these nat gas giants to go bankrupt, where would the nat gas come from? Are we going to start importing it? We've already got enough problems having to import crude from dodgy producing countries.

Your prediction is overtly alarmist.


On Sep 04 09:42 AM Mad Hedge Fund Trader wrote:

> uil. ) Just when I get comfortable with my view on Natural Gas, I
> get a scratchy, reverberating cell phone call from one of the major
> formations telling me that I’m being way too bullish. Gas won’t bottom
> at $2. The free fall will continue until it hits $1. National storage
> will be completely full imminently top out, and when it does, the
> producers will have to shut down completely. Since these guys are
> leveraged up the wazoo, this will trigger a string of bankruptcies,
> and the majors will fall like dominoes. A hedge fund bust won’t define
> this bottom, as these guys are all playing from the short side. UNG
> can’t step in as a buyer of last resort, as the SEC won’t let it
> issue more stock, and the current shares are trading at a ridiculous
> 20% premium. One thing we do agree on is that the bottom will look
> ugly, whatever the spark is. You often get Armageddon type views
> near market bottoms, but this guy has been dead on right until now.
> Well, it takes two to make a market. Conclusion: keep NG nailed to
> your screen, as the widow maker is where the volatility lives.

Sep 10 10:19 AM

[dspg:]

What ever happened to the 10 to 1 ratio of oil to NG? Is it over?

Sep 13 02:10 PM

[Dryspell:]

Acquiring leasehold and drilling wells is very capital intensive. With high prices the rush was on to get as much production online as quickly as possible. With that came exorbitant lease bonuses are skyrocketing drilling costs. You are dead on and these companies badly need increased pricing or some will have to go bankrupt/consolidate.


On Sep 06 02:26 AM c5966 wrote:

> As I tend to be rather debt averse, when it comes to investing in
> common shares, none of these companies appeal to me.
>
> Relative to the cash on their current balance sheets, these companies
> are quite debt heavy. Instead of the energy business, they all seem
> to be in the debt-financing business.

Sep 15 02:23 AM