Natural Gas Stock Trades That Look Past Low Prices
In its recent 2012 outlook, Comstock — which is roughly 95 percent natural-gas weighted — said it will be spending 97 percent of its 2012 budget on the hunt for oil.
“Given the crowded nature of the oil weighted names, some of these gas weighted names, which have some liquids exposure, are today providing better oil production exposure per dollar invested than most of the oily names do,” Stifel says.
The firm argues that these gas E&Ps provide more liquids production exposure per dollar invested than Gulfport Energy andContinental Resources, specifically.
It’s one more trade that finds a way to capitalize on the low natural gas prices, as opposed to shunning the entire natural gas stock sector, but without having to make a call on whether pricing bottoms at an even lower point.
“The real lows might not happen until the fall if storage capacity gets tested which would force gas to move closer to its marginal cash operating costs of approximately $1.75/mcf. As a result, we believe the pure dry gas drillers will have a more difficult time turning around operations until gas prices improve, which currently looks like a 2013 event at the earliest,” Stifel wrote.
Longer-term (two to three years), Stifel says it does make sense to stick with the names with the better asset quality, strong liquids drilling inventory, and no funding issues.
However, if funding issues are manageable (Comstock is always on bankruptcy watch) and gas approaches a seasonal bottom (the drag from natural gas moving lower is alleviated), then “these names become attractive trading opportunities since they provide more attractive liquids production exposure for each dollar invested,” Stifel wrote. Even if natural gas prices are near a historic low, the logistics of having to move energy to where the demand is have favor midstream energy infrastructure master limited partnerships, and this is one more long-term story about the importance of natural gas.
Deutsche Bank is continuing to support this story even though it’s one of the better known investment theses in the energy sector and has resulted in some of the best returning stocks and biggest M&A takeouts in the past year, namely Kinder Morgan Energy Partners’ takeout of El Paso. Deutsche Bank estimates that these midstream MLPs will generate total returns above 10 percent on an annualized basis for the next several years.
MLPs also show an average yield of 6.3 percent, distributino growth of 6 percent to 8 percent, and 5 percent to 10 percent growth in earnings and cash flows.
Deutsche placed “buy” ratings on Enterprise Products Partners, Energy Transfer Partners, Rose Rock Midstream, Western Gas Partners, and Kinder Morgan Energy Partners.
Deutsche projects that all of these midstream MLPs will generate in excess of 18 percent total returns.
These stocks have three ways to grow: Organic, drop-downs, and third-party acquisitions.
In conceding that MLPs are far from an undiscovered story at this point, Deutsche noted that the group showed a 13 percent total return in 2011 against a 2 percent rise in the Standard & Poor's 500 (including dividends).
However, it sees the MLPs as one more “unique secular growth story” related to natural gas and the larger shale drilling boom in the U.S.
“The need for infrastructure construction in North America to match rising natural gas, oil, and natural gas liquids (NGLs) volumes is unprecedented. We estimate North American infrastructure spending of $20 billion per year through 2015 for pipelines, gathering and processing, terminals, and storage. The relative security and stability of fee based business and contracts support the ability of the industry to raise the equity and debt capital needed to build its growth,” Deustche analysts wrote on Tuesday.
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