Natural gas is the fastest-growing energy source in the world because it is one of the cleanest-burning fossil fuels, it’s safe and easy to store, and it’s relatively cheap.
More countries continue to phase out the burning of coal, and natural gas is increasingly the energy source they are turning to.
As demand continues to rise globally, eventually, the supply and demand fundamentals should return to a more normal range, which should help prices to get back to a normal level.
This would be a huge catalyst for top-tier natural gas companies that have had their stock prices slashed more than 75% from just five years ago.
Three natural gas stocks to keep an eye on over the coming months are Peyto Exploration and Development (TSX:PEY), Advantage Oil and Gas (TSX:AAV) and Tourmaline Oil (TSX:TOU).
Peyto
Peyto is one of the lowest-cost producers and one of the best-run companies in Western Canada.
Currently, its daily production averages roughly 80,000 barrels of oil equivalent per day (BOEPD); however, it’s been decreasing output the last few years, as it defers some of its production, leaving it in the ground till better prices are available.
This is quite prudent, as Peyto can make a lot bigger margins on gas due to its incredibly low costs, but not if it sells it all at such low prices.
Peyto’s cost management has been superior the last five years. As the sales price for natural gas has been slashed heavily, Peyto has managed to keep its profit margins consistent, lowering its total supply costs by the same percentage that the price of gas has fallen.
Peyto is also extremely good at managing its dividend and tracking it exactly with the earnings it makes, returning tons of cash to shareholders throughout the years.
Currently, the dividend yields about 7%, and unless it plans to cut production levels again, which is highly unlikely, the dividend will be safe and shouldn’t need to be cut.
Advantage
Advantage is a slightly smaller company but also very well run. It has total production around 45,000 BOEPD. The company has done fairly decently the last few years, as it has been helped by its quality hedging strategies.
Advantage does 95% of its production in natural gas at the moment; however, it has been increasing its liquids exposure to try and take advantage of the better pricing environment.
Over the next three years, Advantage has exciting plans to ramp up its liquids production by over 700% to an estimated 22% of total company production. This will give Advantage growth opportunities and help it to diversify away from natural gas pricing.
It also plans to increase its margins with the goal to try and increase the adjusted funds flow 58% by the end of 2021.
If these plans are executed, and the price for natural gas starts to recover, Advantage will break out and be one of the top performers in Canada.
Tourmaline
Tourmaline is a huge player in Western Canada, especially in the natural gas markets. It’s forecasted to be the top gas producer in Canada in 2019 and expected to produce an average of 300,000 BOEPD.
It’s doubled its liquid production in the last two years, although it still does 80% of production in natural gas.
In total, it’s grown its production from 2010 to 2018 at a compounded annual growth rate of 29%. This is huge growth, and one of the reasons why Tourmaline is one of the biggest companies in the energy sector.
Tourmaline continues to decrease operating and administrative costs on a per-barrel basis. The low costs allow it to be profitable throughout commodity cycles.
It consistently outperforms the AECO index price due to its transportation strategy paying off, allowing it to participate in price rallies at natural gas hubs across North America.
It has around $1.7 billion in net debt and just 1.2 times net debt to cash flow. It also pays a a dividend of about 3.5%, which is nice for investors to sit on while they wait for a turnaround in the natural gas market.
Bottom line
Natural gas can’t stay this cheap forever, and eventually when prices recover, these three companies will lead the way.
