China's Logical Acquisition of Natural Gas in Canada

 |  Includes: BIREF, ECA, PTR
by: Kurt Wulff

Summary and Recommendation

Buy-recommended large cap PetroChina (NYSE:PTR) announced a $5.4 billion purchase of natural gas resources from large cap buy-recommended Encana (NYSE:ECA) in a pending transaction that fits our McDep strategy for long-term investment in natural gas and oil. It is entirely logical that the world’s largest energy consuming country, China, would invest in the world’s cheapest source of clean energy, North American natural gas.

The price to be paid appears to cover, with room to spare, the McDep present value for ECA when allocated to the assets in the deal, primarily ECA’s Montney shale gas / tight gas play along the border of Alberta and British Columbia. Investors can match the strategy in the income and small cap stocks we cover with emphasis on current buy recommendations. Specifically, Birchcliff Energy (OTCPK:BIREF) is a pure play in the same Montney trend and is available at a discount in the stock market at a McDep Ratio of 0.7. BIREF.PK and all our stocks are priced lower by unlevered cash flow multiple, EV/Ebitda, than the apparent 24 that PTR would pay ECA.

Though natural gas price has been under pressure, confidence and values are rising with stock prices in an uptrend. Finally, on a short-term basis, natural gas in storage is depleting more rapidly than usual, which may suggest better pricing ahead.

Originally published on February 11, 2011