Bonavista Energy: Get Natural Gas Without Getting Burned

Jun. 8.12 | About: Bonavista Energy (BNPUF)

Natural gas is great stuff. We have lots of it coming out of the ground and lots more where that is coming from. It burns clean and it's cheap. The part about being cheap is what has me interested and it should have you interested as well.

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The natural gas market was red hot a few years ago. The commodity was selling for as much as $14/MMbtu. Services related to natural gas were hot, land with shale under it was hot, everything natural gas related was hot. It was great for business, but as usual too many sports arenas were named after natural gas companies and here we are over built with a strong supply of the invisible stuff at a decade low price.

I love times like this. A few years ago natural gas was the eco friendly choice for carbon. During that market we saw a huge push for efficient use of natural gas. Power plants and other large scale users were obliged to be smart with engineering. That just makes it even better now that the price has dropped. Power producers are going to rely on NG for higher base load percentages than ever before. It's cheap! The market will shift to accommodate the additional demand and we should see a return to more average prices. We may not ever see that historical correlation between NG and oil return but the market will soon soak up the additional supply either geologically through depletion or financially through price.

In a market like this I'm looking for NG but I'm not giving up some other basic principles. I need a good dividend policy, long life reserves, diverse resources, political stability and good management. Tall order? Not really. Let's look at Bonavista Energy Corporation (BNPUF.PK or BNP.TO)

* Bonavista is in Canada which is a very stable energy market. These guys have lots of room to drill and grow within their existing holdings.

See map below showing resource areas.

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Above graphic and details are from Bonavista's web site, here.

* Hedge book is very limited and will allow benefit from higher prices. This is important. In the falling NG market companies like Linn Energy (LINE) have benefited greatly with a hedge book protecting them from the lower prices. When prices do rise this can be a problem for the stock price as the earnings will not rise in proportion. It's good for business and I respect and own Linn. However, current opportunities are better for un-hedged or less hedged producers, like Bonavista.

* Sustainable dividend policy and good management. The record of dividend payout reflects the re-structure to a corporation in 2011 and the subsequent changes. The payout ratio has moved up from being set at a conservative level around 45% last year as the hedges have come off at lower gas prices. Management supports the current pay out as safe at 8.2%.

* Bonavista (OTCPK:BNPUF) production is 60% gas/40% oil. This company is a great way to get paid to wait for natural gas prices to recover. I do lean towards putting Bonavista in clients IRA's as to avoid the pesky foreign income tax of 15%. However, it's still a yield of 7% even after that tax is taken out. The price is still hovering around the 52 week low while showing improvement in technical metrics. This is looking good to me. Chart from tmx.quotemedia.com.

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I'm adding Bonavista at these levels.

Disclosure: I am long OTCPK:BNPUF.