Last week, U.S. natural gas futures notched their fifth weekly gain in a row, up 96% YTD and hit their highest settlement since October 2008. The front-month May contract (NG1:COM) jumped 16% for the week to settle at $7.30/MMBtu.
The interesting part: investors are betting the surge will last for months, if not years.
You can tell this by looking at trends in the nat. gas futures markets: futures due for settlement 10 months out are also trading above $7 on while the January 2024 contract is above $5, a clear indication of strong bullish sentiment running through the gas markets.
A late-season blast of cold weather across the U.S. was a major reason for last week's surge. However, another major reason for the sustained increases that could continue is an "increasingly bullish fundamental backdrop as inventories are now sitting 23.9% lower than the same period last year, and 17.8% lower than the five-year average," as Tyler Richey, co-editor at Sevens Report Research, has told MarketWatch.
Last week, the U.S. government reported that gas in storage rose by 15B cf, less than half the normal rise of 33B cf, bringing total storage to 1.397T cf. This means that supplies are 439Bcf less than a year ago and 303Bcf below the five-year average.
Combined with "strong demand so far in the spring 'shoulder season,' when supply is supposed to build substantially before summer demand picks up, has bolstered prices as supply is expected to remain well below average for the foreseeable future," Richey has said.
The biggest reason, however, for the natural gas surge is that foreign countries are signing large deals to import U.S.-produced gas in the form of liquefied natural gas, or LNG. Europe wants American gas so that countries there can pivot away from Russian gas. With U.S. exporters set to meet with customers in Berlin this week, additional demand-related news could be coming from the likes of Cheniere Energy (NYSE:LNG) and Tellurian Inc. (NYSE:TELL). Related: U.S. Natural Gas Prices Hit Highest Level In 14 Years
As you might expect, natural gas equities have been flying: last quarter, the United States Natural Gas ETF (NYSEARCA:UNG) and the United States 12 Month Natural Gas ETF (NYSEARCA:UNL) emerged as the best-performing ETFs across the entire U.S. market, notching returns of 57.9% and 53.3%, respectively.
However, the American energy market has nothing on its neighbor to the north: Canada's famous Oil Patch.
The Canadian energy market has been playing chess while everyone else is playing checkers: the country's energy benchmark, Horizons S&P/TSX Capped Energy ETF (HXE.TO), is up a roaring 101% over the past year, nearly 40 percentage points better than its American brethren and more than 4x higher the S&P/TSX Composite Index return. Horizons HXE seeks to replicate the performance of the S&P/TSX Capped Energy Index, net of expenses. The S&P/TSX Capped Energy Index is designed to measure the performance of Canadian energy sector equity securities included in the S&P/TSX Composite Index.
Over the past few years, a vicious one-two-three punch started with a gloomy long-term future outlook due to rampant fossil fuel divestments, climate change policies, and decarbonization, as well as shorter-term, but severe shocks from the COVID-19 crisis threw Canada's most important exports industry into an existential crisis. Meanwhile, the drumbeat of exits by foreign oil firms bailing on the unprofitable tar sands added an extra layer of gloom for an industry that's responsible for a fifth of Canada's exports.
But with the oil and gas comeback, long-suffering Canadian energy stocks are looking like real bargains.
Source: Y-Charts
Here are some top Canadian gas stocks trading on the TSX and American exchanges. Many are mid-and small-cap companies, underscoring the strength of the bull market.
1. NuVista Energy Ltd
Market Cap: $2.0B
12-Month Returns: 408.6%
NuVista Energy Ltd .(OTCPK:NUVSF)(TSX:NVA) is a Calgary, Canada-based oil and natural gas company that engages in the exploration, development, and production of oil and natural gas reserves in the Western Canadian Sedimentary Basin. The company primarily focuses on the condensate-rich Montney formation in the Wapiti area of the Alberta Deep Basin.
NuVista is reaping huge dividends for its massive investments in the natural gas business.
Last year, the company's adjusted cash flows more than doubled and allowed the company to pay down a significant amount of its long-term debt. The company is targeting a long-term sustainable net debt target of less than 1.0 times adjusted funds flow in the stress test price environment of US$ 45/Bbl WTI and US$ 2.00/MMBtu NYMEX natural gas, representing a target net debt level of $200 - $250 million. Related: Oil Prices Rally Back To Pre-Strategic Petroleum Release Levels
2. Birchcliff Energy Ltd
Market Cap: $2.1B
12-Month Returns:239.9%
Another Calgary-based energy company, Birchcliff Energy Ltd.(OTCPK:BIREF) (TSX:BIR) is an intermediate oil and natural gas company that acquires, explores for, develops, and produces natural gas, light oil, condensate, and natural gas liquids in Western Canada.
The company holds interests in the Montney/Doig resource play located approximately 95 km northwest of Grande Prairie, Alberta. Its asset portfolio also includes various other properties, including the Elmworth and Progress areas of Alberta. As of December 31, 2021, the company had interests in 200,712 net acres of undeveloped land, as well as proved plus probable reserves of 1,022 million barrels of oil equivalent.
A couple of years ago, Birchcliff was struggling thanks to low natural gas prices and a high net debt position. But the situation has improved dramatically, and Birchcliff is taking advantage of the strong gas price to rapidly reduce its net debt.
3. Enerplus Corp.
Market Cap: $3.3B
12-Month Returns: 157.4%
Enerplus Corporation (NYSE:ERF)(TSX:ERF), together with subsidiaries, engages in the exploration and development of crude oil and natural gas in the United States and Canada. The company's oil and natural gas properties are located primarily in North Dakota, Colorado, Pennsylvania; and Alberta, British Columbia, and Saskatchewan.
As of December 31, 2021, the company had proved plus probable gross reserves of approximately 8.2 million barrels (MMbbls) of light and medium crude oil; 20.7 MMbbls of heavy crude oil; 299.3 MMbbls of tight oil; 56.2 MMbbls of natural gas liquids; 19.7 billion cubic feet (Bcf) of conventional natural gas; and 1,367.9 Bcf of shale gas.
Last November, Jason Bouvier, analyst at Scotiabank, told the Financial Post that Canadian oil producers are "essentially printing money" at current oil and gas prices, and many would still have "still ample" free cash flow, even in a scenario of a drop in WTI to US$55.
Bouvier said that average breakeven costs for small and mid-cap companies stand at a slightly higher US$43.50 per barrel, and identified Enerplus Corp. (NYSE:ERF) as one of Canada's energy companies with the lowest capex breakevens (including hedging gains).
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4. Peyto Exploration & Development Corp
Market Cap:$1.9B
12-Month Returns: 173.0%
Peyto Exploration & Development Corp. (OTCPK:PEYUF)(TSX:PEY) engages in the exploration, development, and production of oil and natural gas, and natural gas liquids in the Deep Basin of Alberta. As of December 31, 2021, the company had a total proved plus probable reserves of 904 million barrels of oil equivalent.
Last year, Peyto recorded a 121% increase in funds from operations amid a recovering natural gas market and rising production, allowing the company to hike its dividend by an impressive 1,400% from $0.04 per year to $0.60 per year.
5. Ovintiv Inc.
Market Cap: $13.8B
12-Month Returns: 130.5%
Ovintiv Inc.(NYSE:OVV)(TSX:OVV) is a Denver, Colorado-based company that, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids. OVV was founded and headquartered in Calgary, Alberta, and was the largest energy company and largest natural gas producer in Canada before it rebranded as Ovintiv and relocated to Denver in 2019–20.
The company operates through USA Operations, Canadian Operations, and Market Optimization segments with principal assets in the Permian in west Texas and Anadarko in west-central Oklahoma as well as Montney in northeast British Columbia and northwest Alberta. Its other upstream assets comprise Bakken in North Dakota, and Uinta in central Utah; and Horn River in northeast British Columbia, and Wheatland in southern Alberta.
Last month, Mizuho upgraded OVV to $78 from $54 (good for 45% upside to the current price), citing improving tailwinds.
By Alex Kimani for Oilprice.com
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