Why U.S. investors should be exploring Canadian gas
This U.S. advisory is bullish on the future of natural gas, and directs U.S. investors to a huge Canadian gas field and a big Canadian stock.
It is winter in the Northern Hemisphere. You’ve probably noticed.
That means heating bills go up. That means the price of natural gas goes up, or should.
And at $6, it’s certainly higher than it was in July. But there’s a lot of it sitting around in storage, so it’s not like we’re running out of the stuff.
Still, one U.S. advisory, Richard C. Young’s Intelligence Report, thinks investors down south should be looking north to one big natural gas venture in Canada, and one big natural gas stock.
The first object of Mr. Young’s enthusiasm is a mammoth shale gas field in northeastern British Columbia.
The second is a company with a big stake in that field, EnCana Corp. (TSX/NYSE-ECA).
And natural gas is the fuel of the future, this editor insists.
Enthusiastic about Canada
Mr. Young is frequently enthusiastic on the subject of Canada and its investment potential (in part, we suspect, because he has so little affection for the current U.S. government and its economic policies).
Among his Monster Master List of almost 80 stocks he includes three Canadian banks — Bank of Nova Scotia (TSX/NYSE-BNS), Royal Bank (TSX/NYSE-RY) and Toronto-Dominion Bank (TSX/NYSE-TD) — and both major Canadian railroads, Canadian National (TSX-CN; NYSE-CNI) and Canadian Pacific (TSX/NYSE-CP).
Just for good measure, he also recommends Cameco Corp. (TSX-CCO; NYSE-CCJ), the world’s largest uranium producer.
But our business with him today takes us to the shale gas fields of North America, and specifically to the Horn River Basin.
One quadrillion cubic feet
“Shale gas offers enormous opportunity to increase global energy supply and security,” says Mr. Young, who would be very happy to see the U.S. and other developed nations reduce their dependency on oil.
According to a study from Exxon Mobil, there are one quadrillion cubic feet of shale gas worldwide, or a decade’s worth of demand. And the drilling is just getting started.
Ten years ago, producing shale gas was economically unfeasible. But new techniques have made production possible at reasonable prices.
Mr. Young describes the process. “To extract shale gas, which is trapped in a dense rock, companies first drill a horizontal well through the rock, then inject high-pressure liquid to fracture the rock and cause it to release gas. The gas is then pumped to the surface.”
Shale discoveries in the U.S. have turned a shortage of domestically produced gas into a fully supplied market, he adds. Now comes the latest big discovery — in the Horn River Basin of northeastern B.C.
The best yet
The Horn River Basin is the largest shale gas field in Canada. EnCana executive vice-president Michael Graham has stated that it may be the best shale play in North America.
Exxon Mobil has leased 250,000 acres in the basin, and Exxon does not throw money around loosely, says the editor. “If Exxon is involved in an emerging gas play, you can be sure there is long-term value to be extracted.”
Exxon’s initial drilling indicates that each well will produce between 16 and 18 million cubic feet per day, which is comparable to the yield in the giant Haynesville field in Louisiana.
But won’t all this natural gas depress the market further?
No better energy commodity
“With shale gas flooding the market, many investors are bearish on natural gas,” admits Mr. Young. “I’m not in this camp. Short-term, supply may overwhelm demand, but long-term, there is no better energy commodity to own than natural gas.”
According to his charts, natural gas is historically cheap compared to coal, oil and uranium. “The sooner businesses, utilities and residential consumers recognize that there is an adequate supply of natural gas, the sooner you will see an increase in natural gas demand and higher prices.”
On an energy-equivalent basis, he adds, gas should trade at one-sixth the price of oil. So if oil is trading at $83, gas should be at $13.80. A far cry from the present $6.
“Either natural gas prices are depressed,” Mr. Young concludes, “or oil prices are inflated. In either case, you should prefer natural gas over oil.”
You should also prefer EnCana, he believes. With a 260,000-acre position, this “highly favored” company is one of the largest players in the Horn River Basin.
EnCana, of course, has divided itself into two companies. EnCana remains a “pure-play natural gas company focused on the development of unconventional resources,” the editor tells his readers. It is targeting 9 to 12 per cent annual growth over the next five years. The shares have been up lately and trade at $36. They yield 2.3 per cent on the 83¢ dividend.
He also likes the other half of the divided firm, Cenovus Energy (TSX/NYSE-CVE). “If you still own shares of Cenovus from the spin-off, continue to hold them,” he says. He promises to keep a close eye on the company. It trades at $27 and yields 3 per cent on the 83¢ dividend.
Will natural gas take its place as the fuel of the future? This editor’s opinion is clear: if some of the biggest energy firms in North America are investing in it, so should you.
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