I have been closely following the natural gas weighted companies for 3 years now and I have come through all their ups and downs. I noticed that several Canadian natural gas producers enjoy a significant premium in their current valuations versus some U.S.-based ones. As the other contributors of SeekingAlpha have rarely dealt with this premium thus far, I decided to write an article about it. I cannot know whether the market will ever close this premium in the future. If yes, then these 4 U.S.-based natural gas producers below could be a buying opportunity at the current levels.
The US-based natural gas producers
1) Bill Barrett (BBG) produces approximately 54,000 boepd (72% natural gas) as of the Q2 2012 report. It trades for just 40,000 $/boepd and the market cap is just 2,5x the annualized FFO for 2012. Its PBV is as low as 0,9.
2) EXCO Resources (XCO) produces approximately 92,000 boepd (66% natural gas) as of the Q2 2012 report. It trades as low as 39,000 $/boepd and the market cap is 3x the annualized FFO for 2012. Its PBV=2,2.
3) WPX Energy (WPX) produces approximately 240,000 boepd (78% natural gas) as of the Q2 2012 report. It trades for only 20,000 $/boepd and the market cap is 3x the annualized FFO for 2012. Its PBV is as low as 0,6.
4) Unit Corporation (UNT) produces approximately 47,000 boepd (58% natural gas) with the latest acquisition in Oklahoma from Noble Energy (NBL) included. It trades for 58,000 $/boepd and the market cap is just 2,5x the annualized FFO for 2012. Its PBV=1.
The Canadian peers
Let's check the current metrics (PBV, $ per flowing barrel, market cap/FFO annualized ratio) of the Canadian natural gas producers. The significant premium they enjoy is quite clear:
1) Paramount Resources (PRMRF.PK) produces 22,000 boepd (82% natural gas) as of Q2 2012 report. It trades for a sky high 155,000 $/boepd and the market cap is as whopping as 60x the annualized FFO for 2012. Its PBV=3,2.
2) Tourmaline Oil (TRMLF.PK) produces 57,000 boepd (85% natural gas) including the recent acquisition of Huron Energy (private). It trades for a high 105,000 $/boepd and the market cap is 20x the annualized FFO for 2012. Its PBV=2,4. As an investor, I also feel rather disorientated with the use of "oil" in the name of this company. With so much natural gas, this company should be called "Tourmaline Natural Gas" instead.
3) Painted Pony Petroleum (PDPYF.PK) produces 5,400 boepd (76% natural gas) according to the latest report. It trades for a very high 140,000 $/boepd and the same goes with the market cap which is 18x the annualized FFO for 2012. Its PBV=1,8. The "petroleum" does not make sense here either. I think the company should be called "Painted Pony Natural Gas" instead.
4) Peyto Exploration (PEYUF.PK) produces 50,000 boepd (89% natural gas) currently according to the latest corporate presentation. It trades for 90,000 $/boepd and the market cap is 12x the annualized FFO for 2012. Its PBV=3,5.
5) ARC Resources (AETUF.PK) produces 94,000 boepd (62% natural gas) as of the Q2 2012 report. It trades for 90,000 $/boepd and the market cap is 10x the annualized FFO for 2012. Its PBV=2,4.
6) Cequence Energy (CEQXF.PK) produces 8,700 boepd (75% natural gas). It trades for 45,000 boepd and the market cap is 12x the annualized FFO for 2012. Its PBV=0,9.
7) Advantage Oil and Gas (AAV) produces 22,000 boepd (95% natural gas). It trades for 40,000 $/boepd approximately and the market cap is a whopping 15x the annualized FFO for 2012. Its PBV=0,5.
So what is the reason for this significant Canadian premium?
1) Do the recent "Asian landings" on the Canadian properties fuel such a premium? Will the American peers ever rise to close it, or will the Canadian producers drop? I wish I knew. The Malaysian Petronas paid 110,000 $/boepd and 25x the annualized FFO for Progress Energy Resources (PRQNF.PK) which produces 46,000 boepd (84% natural gas). The giant ExxonMobil (XOM) also paid 100,000 $/boepd and a whopping 25x the annualized FFO to buy Celtic Exploration (CEXJF.PK), which produces 19,500 boepd (77% natural gas). I add on the aforementioned M&A activity, the recent deal between the Chinese CNOOC (CEO) and Nexen (NXY), the two deals between the South African Sasol(SSL) and Talisman (TLM) in 2010/2011, along with the deal between the Korean KOGAS and Encana (ECA) in 2010, and I start wondering which Canadian company will be next.
In the meantime, I have not seen any significant "Asian landings" on the U.S.-based properties lately. A Chinese company paid $27.5 M and an Indian one paid $82.5M for a 10% and a 30% stake respectively in Carrizo's (CRZO) Niobrara land. That is all. Both deals are obviously lagging the ones with the Canadian producers above.
2) One could assume that the AECO price enjoys a significant premium to the Henry Hub price. However, the sproule.com website shows that AECO (C$/MMbtu) has been lagging Henry Hub ($US/MMbtu) by 15% on average for more than 10 months now. So this does not seem to be the reason.
3) Another investor could claim that these Canadian natural gas weighted companies have significant Montney land, which is both very oil liquids rich and close to the Liquefied natural gas export terminals in Kitimat or in Prince Rupert of British Columbia. But if so, why does Terra Energy (TTRHF.PK) from the main Toronto board trade at the current dirty low valuation although it holds a big Montney land package (130,000 net acres) in Inga, where Celtic Exploration also operates?
4) Is the dividend the reason? Some of the aforementioned Canadian natural gas weighted companies pay a dividend, and thus they have attracted several income investors. Although I personally would never sacrifice a 5%-7% dividend for a potential and sudden drop of about 20%-30% due to an overvaluation, there are other investors who are reaching for yield and will forego value just to get a dividend.
5) Do the investors pay off-the-charts valuations just because the respective management teams are great? The truth is that a good, efficient management team adds value and some companies have very respected management teams in the Canadian oil patch and excellent, consistent track records. However I highly doubt that all these natural gas weighted Canadian companies have top notch, Crescent Point type of management teams that should add such an astounding premium on their companies' valuations.
Whatever the reasons are, the investors have to compromise with this premium currently. However if this premium disappears one day, it is likely to favor the U.S. based natural gas producers above in case they rise to match the Canadian metrics and ratios.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WPX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: I am not an investment advisor and this article does not constitute a buy or sell recommendation for any stock mentioned.