canaccords perspectivecanaccords perspective
Natural Gas (NGAS : NYMEX : US$3.58), Net Change: -0.06, % Change: -1.75%
Peyto Exploration & Develop.* (PEY : TSX : $24.45), Net Change: -0.11, % Change: -0.45%, Volume: 336,044
Time to get gassy? On Thursday, natural gas futures ticked up after the EIA reported the first storage withdrawal of the season, which surprised consensus and forced some short covering. The EIA reported a 1 Bcf storage withdrawal, which was well below Street’s 10 Bcf injection expectation and Canaccord Genuity’s 8 Bcf estimate. Storage now stands at 3,851 Bcf, 1% above last year and 7% above the five-year average. On comparative metrics, the year-over-year storage surplus expanded by 22 Bcf to 46 Bcf, while the five-year average surplus swelled by 28 Bcf to 261 Bcf (largest since December 2010).
The injection implies a modest week-over-week loosening in the supply/demand balance and suggests the market has been almost 3 Bcfpd oversupplied on a four-week moving average basis.
While certainly supportive relative to consensus, the surprise withdrawal is likely not a sign of sea change in the underlying supply/demand fundamentals. That said, Canaccord Genuity Portfolio Strategist Martin Roberge thinks we may be at or near a bottom.
He believes the highlight in November was the temporary plunge in natural gas below coal prices. Also, while the price of natural gas could revisit 2009 lows around $3.0 mmbtu, he believes a bottoming phase is forming.
Why? First, natgas is much cheaper than it was in 2009 vs. other sources of energy. Second, producers are finally showing some discipline with U.S. gas rig counts falling from 936 to 865 over the past six weeks. Third, injections have been much below consensus in November. Fourth, December exhibits a positive seasonality for natural gas prices. And fifth, natgas has been shorted against most commodities in 2011 and short-covering rallies to protect gains are likely
before year-end.
For investors looking for natural gas leverage, Peyto (~88% of production) offers investors high leverage to
changes in the underlying commodity.
For every +$1/Mcf change in natural gas prices, Canaccord Genuity estimates its contingent NAV increases by ~$9/share. Despite its high gas weighting, Peyto has peer average group cash flow netbacks, owing to its status as the lowest cost operator in the Basin.