Units of Canadian Deep Basin natural gas producer Peyto Energy Trust (OTCPK:PEYUF) offer unlevered appreciation potential of 20% to our new estimate of Net Present Value (NYSE:NPV) of US$18. On the basis of continued success with horizontal multistage fracturing, we raise NPV from US$15 a unit. Second quarter volume was up 8% from the first quarter and 23% from the previous year. Further quarterly gains seem likely at the rate the trust is drilling, though we hold volume constant in our projection. The technological success on a classically valuable resource base contributes to our comfort with a high multiple of present value to cash flow normally implied by the extra long reserve life Peyto reports.
The ability of Peyto and other successful producers to increase volume has helped the supply of natural gas keep up with demand and hold price down. Last week for the first time this summer, inventory of natural gas in storage for the coming winter dipped below the upper limit and into the range for the past five years. At least for one week, supply growth slowed relative to demand growth, implying the need for higher price in the short term. Long term demand for natural gas is practically unlimited considering the enormous volumes of coal burned every day in the U.S. and China, which ought to be replaced by cleaner fuel, in our opinion. The market potential is also large in transportation, but it will take longer.
At the same time, low natural gas price accentuates the inefficiency of subsidies to wind and solar that over-leveraged economies can ill afford. We like the income and small cap investment opportunities in growing, clean energy offered by Peyto and peer stocks.
Originally published on August 13, 2010.