Will the Rally for Natural Gas Stocks Be Sustained?

The pop on natural gas stocks such as Tourmaline Oil Corp. (TSX:TOU) was welcoming, but will it continue?

Kay Ng

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published December 12, 2017 7:57 am EST

There has been an oversupply of natural gas, so the natural gas price has been low. As a result, the stocks of gas-weighted producers, including ARC Resources Ltd. (TSX: ARX), Peyto Exploration & Development Corp. (TSX: PEY), and Tourmaline Oil Corp. (TSX: TOU) have done poorly recently. In the last 12 months, the stocks have declined ~36%, ~56%, and ~39%, respectively.

The stocks bounced by 3.2%, 5.7%, and 2.8%, respectively, on Monday, but the stocks are still trading at multi-year lows.

Could the bounce be the start of a rally? Is it time to get in? Here’s a quick overview of the three producers.

Arc Resources

Arc Resources was founded in 1996. Its operations are focused on the Montney resource play in northeast British Columbia and the Pembina Cardium in Alberta. Its assets provide stable long-life production and growth potential. Its production mix is about 71% gas.

The Street consensus from Thomson Reuters has a 12-month target price of $20.90 per share on the stock, which represents upside potential of ~39% from the recent quotation of ~$15 per share. Additionally, Arc Resources offers a yield of ~4%.

Peyto

Peyto was established in 1998. It is the fifth-largest natural gas producer in Canada. It’s a low-cost producer, which focuses its operations in the Alberta Deep Basin. Its production mix is about 92% gas.

The Street consensus from Reuters has a 12-month target price of $23.60 per share on the stock, which represents upside potential of nearly 59% in from the recent quotation of $14.86 per share. Additionally, Peyto offers a yield of almost 8.9%.

Tourmaline

Tourmaline was established in 2008 and is led by certain key members of Duvernay Oil Corp. and Berkley Petroleum Corp, which were success stories. Tourmaline’s three core operating areas are the Alberta Deep Basin, the northeast B.C. Montney complex, and the Peace River High Charlie Lake complex. Its production mix is about 84% gas.

The Street consensus from Reuters has a 12-month target price of $32.50 per share on the stock, which represents upside potential of ~44% in from the recent quotation of ~$22.50 per share.

Investor takeaway

The producers can’t control the prices of the underlying commodities. However, the gas price can improve if demand increases (for example, if the weather cooperates and becomes colder) or if producers reduce their level of production.

Investors with a high-risk tolerance might nibble some of these gas producers for potential outstanding double-digit returns. Cautious investors should wait to see if the pop will be sustained during the week before considering a position.

Lastly, don’t trust the dividends offered by gas producers. If bad becomes worse, the ones that pay dividends, especially a big one, might end up cutting them.