For Sale - Companies Selling Assets Into A Rising Natural Gas Price Environment

by: Josh Young

Natural Gas prices (NYSEARCA:UNG) have risen substantially in the past year, from a low of below $2 to over $4 now, and there is now chatter about prices potentially hitting $5 this year. In this environment, it is interesting to track companies selling natural gas assets, as they could achieve higher than expected valuations in the strongest natural gas pricing environment in more than a year.

One company selling assets is Sonde Resources (NYSEMKT:SOQ). Sonde is selling its producing properties in Canada, which are 2/3 natural gas. Management mentioned previously that they would expect at least $70 million for the 2p reserves, plus some additional potential value for undeveloped Drumheller and Michichi oil locations. This compares to a current market cap of $90 million. The company also has substantial undeveloped holdings in the Duvernay, where EOG (NYSE:EOG) and Encana (NYSE:ECA), among others, are active. And it has a North African field it is farming out, which should yield SOQ at least $70 million in cost recovery. If SOQ realizes a higher than expected price in its gas asset sale, it would represent a significant portion of the current market valuation of the company.

Another company selling assets is Gastar Exploration (NYSEMKT:GST). Gastar is selling its E Texas Bossier Sands field, which is producing over 12.5 mmcf/d, has EagleBine potential above it, and substantial undeveloped Bossier Sand resource. Encana bought a nearby field in 2007 for over $1 billion. Management mentioned on a recent conference call that they expected to sell the asset for at least $40 million. With the recent improvement in gas prices, that number could rise, and that could be substantially beneficial to the company, as the asset has not been generating much cash flow and the proceeds could be used to pay down debt.

Another company selling assets is Geomet (GMETP). Geomet is selling royalty interests in wells in the Black Warrior basin. A nearby asset was sold by Constellation (CEP) at a higher than expected valuation recently, and Geomet's asset is considered even more valuable because it is royalty interest and not working interest (Geomet gets a % of revenue without having to pay for overhead costs). As an added benefit, GMETP pays a 12.5% yield PIK, which is closer to a 19% yield-to-call. If Geomet gets a good value in its sale, which seems increasingly likely considering rising natural gas prices and a successful sale by CEP, GMETP could trade up to a yield-to-call closer to 12.5%, and investors holding GMETP (like myself) get paid to wait.

And finally, Gasco (GSX) has not announced a sale but mentioned in its recent disclosures that the company may have a risk of being a going concern as its cash flow is insufficient to support its debt, and is reviewing strategic alternatives. This is obviously a dicey scenario, but Gasco is sitting on a huge amount of natural gas resource in the Uinta Basin, right next to Newfield (NYSE:NFX). If Gasco can get value for its undeveloped gas, which gets more likely as gas prices increase, perhaps it can fix its liquidity issues and become a going concern. Gasco is particularly interesting because of its deep exploratory program on the flanks of California oil fields, a program similar to one being executed by Occidental Petroleum (NYSE:OXY). One successful discovery could dramatically increase Gasco's reserve value, making Gasco's survival of particular interest.

Disclosure - I am long SOQ, GST, GMETP, GMET and GSX. These are all small oil and gas companies, which have particular risks due to their small size and liquidity situations. This is not a recommendation to buy any of these stocks, simply an article discussing possible beneficiaries of rapidly rising natural gas prices, particularly companies with natural gas assets on the market. I reserve the right to buy or sell any stocks mentioned at any point. Caveat Emptor.

Business Disclosure: 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.