3 Stocks to Benefit From the Spike in Natural Gas Prices

Record cold weather means energy stocks are heating up.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published January 22, 2014 7:30 am EST

Cold weather has been a gift to natural gas producers. The arctic vortex that has gripped many parts of the United States and Canada is back and continues to impact natural gas demand and supply dynamics, at least for the short term.

As a result of this increase in demand, we have seen record natural gas storage withdrawals. The week of January 10 saw a 287 bcf (billion cubic feet) decrease in natural gas storage, which is the highest withdrawal in 20 years. Another significant data point that is bullish is the fact that natural gas storage has fallen below the five-year average level. According to the Energy Information Administration, natural gas storage levels are 528 bcf below last year’s levels (a 15% decline) and 315 bcf under the five-year average (a 10.1% decline).

Natural gas production has been negatively affected by the cold, as the extreme freezing temperatures have hampered the ability to keep production flowing as usual. As a result of these dynamics, natural gas prices in Alberta closed at $4.08 per btu yesterday, its highest level since June 2011. This represents a 28% increase over the average price in the first quarter of 2013 of $3.18.

3 energy companies likely to see a boost

This is setting up for an earnings season that sees energy companies beating expectations and a lift in their stock prices. Let’s take a look at a few of the companies that are poised to benefit.

Although Encana (TSX:ECA, NYSE:ECA) is working on reducing its natural gas exposure (which may be another example of bad timing, only time will tell), the company is still leveraged to natural gas prices. And it has the option to easily increase natural gas production.

Birchcliffe Energy (TSX: BIR) operates in the Montney shale gas play and its production is comprised of 76% natural gas. The company has seen good production growth last year. Production increased 15% in the third quarter of 2013 and almost 17% in the first six months of 2013.

Tourmaline Oil Corp (TSX: TOU) is also heavily weighted toward natural gas production. Last year, 89% of its production was natural gas and the company is achieving very strong production growth rates (46% growth in production in the first nine months of 2013). And as icing on the cake, the company has a healthy balance sheet.

Foolish bottom line

As we enjoy the effect of stronger natural gas prices on our investments, the question for the longer term is whether or not this strength is here to stay. Have supply/demand fundamentals finally shifted?