Natural gas has headed higher in recent days largely due to a bullish U.S. inventory report which reported that inventories rose less than expected by 45 billion cubic feet for the week ended May 5.
Total inventories are 372 billion cubic feet lower than they were a year ago, but that’s 275 billion cubic feet above the five-year average. The five-year average is an important threshold because history shows that when current inventories fall below the five-year average, it is a positive sign for the price of natural gas.
Which stocks should investors purchase if they believe that natural gas prices will head higher over time? The easiest answer is that investors should buy a basket of stocks that have exposure to natural gas prices.
This will diversify investors’ exposure because it is fair to say that with natural gas producers, especially the mid to small ones, results and stock prices are volatile, so this would diversify company-specific risks.
So, a basket like this should probably hold stocks such as Peyto Exploration and Development Corp. (TSX:PEY), Birchcliff Energy Ltd. (TSX:BIR), Nuvista Energy Ltd. (TSX:NVA), and Tourmaline Oil Corp. (TSX:TOU). These are four natural gas-focused companies that will benefit from strengthening natural gas prices.
Birchcliff’s production is almost 80% weighted to natural gas, and its stock price has a three-year return of -43% and a one-year return of 38%. The company has seen good production growth in the first quarter of 2017 — a 47% increase.
Peyto is another company that is heavily weighted toward natural gas production at roughly 90%, and its stock price has a three-year return of -38% and a one-year return of -18%. In the first quarter of 2017, production was flat versus last year, and cash costs remained industry leading at $0.89/mcfe.
Tourmaline is also heavily weighted toward natural gas production. Last quarter, 85% of its production was natural gas, and the company achieved a 7% growth rate in production. Its stock price has a three-year return of -48% and a one-year return of -4%.
Lastly, Nuvista Energy has almost 70% of its production in natural gas, and achieved an 8% increase in production in the first quarter of 2017.
The story for these stocks is not only the macro factors (i.e., natural gas prices), but there are also company-specific improvements that all companies have been implementing and seeing success with. Balance sheets are strong, costs have been declining, and these companies have good resource bases working in their favour.
As these investments would be classified as being on the risky end of the spectrum, the reward is big when things work in their favour. Regardless, though, investors would be wise to only put a small portion of their portfolios to such investment ideas.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
Fool contributor Karen Thomas owns shares of BIRCHCLIFF ENERGY LTD. and NUVISTA ENERGY LTD.