Canadian gas-weighted E&Ps are, on average, reflecting US$3.70/mcf HH.
The gas price being reflected equities is modestly (6%) higher than current 2024 HH futures pricing (US$3.47/mcf) and ~60% higher than spot. TD's 2024 HH price forecast of US$3.50/mcf is in line with current strip.
There is an array of implied gas prices within our natural-gas coverage universe. Those that are trading at a notable discount to 2024 strip HH pricing include NuVista (US$2.70/mcf HH), Advantage (US$2.85/mcf), and Peyto (US$3.10/mcf HH).
On the other end of the spectrum, Tourmaline carries the highest implied gas price of the group at US$4.70/mcf, followed by Birchcliff (US$4.30/mcf) and ARC (US$4.10/ mcf). Given the scale, medium-term growth and diversified exposure, we believe Tourmaline and ARC warrant a premium to their peers. In our view, Birchcliff's valuation is largely supported by its outsized yield.
Equity Positioning
Although we acknowledge that if gas prices move higher, the implied price within the equities may also nudge higher, we believe this is limited. For historical context, when HH reached US$8.70/mcf (June 1, 2022), we calculated at that time that gas- weighted equities were reflecting US$4.75/mcf HH - only 28% higher than today.
We anticipate that natural-gas prices will improve from current levels through 2024. However, from a valuation perspective, we believe much of this is currently factored into many of the equities. This equates to thin 12-month total-return estimates for much of our gas-weighted coverage universe. Those that offer the most return potential under our current price forecasts include Advantage and Peyto.