Natural Gas prices, out of favour for some time, have already bottomed, according to Josef Schachter, author of the Schachter Energy Report. He is surprised by how dramatically undervalued natural gas stocks currently are especially when he sees AECO prices climbing as high as $3.00 by 2020.
He explains, “When the price of Natural Gas is so low, companies find it uneconomic to produce the gas so they shut-in production rather than sell it at a discount to costs. When the Natural Gas inventories are low, the price goes up.” His view is that this winter, with lower than normal storage inventories, AECO will rise again and stay there for some time, making operations viable again. “If it is cold winter,” he warns, “prices could go up even further.”
Oil stocks, on the other hand, had bounced with the rally in oil prices this year. Now however, oil prices are retreating from the late-June high of $US75.27/b as the summer peak energy demand period (summer driving season) is coming to an end. Crude currently trades at US$67/b and Schachter expects it to fall below US$60 in the coming month or so.
As a result, the S&P/TSX Energy Index has retreated from its high of 213 to 201, a decline of nearly 6%. Stocks that are leveraged to higher crude prices have been particularly hard hit. Baytex Energy, for example, declined from its high of $6.23 to just over $4 recently, or down 35% and MEG Energy retreated from $11.51 to $7.80 recently or down 32%.
Schachter predicts one last plunge in oil prices to below the US$60/b level later this year. “If we are right about lower crude prices,” says Schachter, “the Energy Index should fall to below 160, implying a further 20% overall energy sector downside. Hold cash and remain patient for a great buying opportunity during the tax-loss selling season of 2018 which occurs from mid-November through early December.”
So why is Schachter so bullish on natural gas at the moment and focusing his recommendations in this area? One key reason – lower storage levels.
The Energy Information Agency (EIA) reports weekly on US natural gas storage. It is extremely low versus the norm. US demand has been very strong this year due to high temperatures and strong demand for electricity generated by natural gas, prevents large injections of gas into storage facilities. Additionally, the ramp up in US LNG exports is also slowing normal injection levels. Schachter explains that last week (August 3rd) only 46Bcf went into storage which is now at 2.35Tcf. This level is 22% below the five-year average and even with normal injections from here on, with only 14 more weeks in the injection season, it is likely that storage will only build to the 3.1-3.2Tcf level, below 3.8-4.0Tcf which is the normal range at the start of winter. Recent injections have also been below normal, adding to the problem.
Historically when inventories started out low in the fall, prices rose sharply when the first cold spell struck. For example, in 2005-2006 when storage had peaked at under 3.2Tcf and winter hit, the price of NYMEX rose from US$6/mcf to US$15/mcf. In 2009 when storage was low, demand picked up quickly with Canadian exports rising sharply to meet the needs during that winter, from below 8Bcf/d to 10Bcf/d. “According to EIA records, Canadian import prices rose from $2.85/mcf in September that year to $5.29/mcf in December.
Today, the industry would be euphoric to see over $5/mcf for AECO. During the strong period for natural gas prices in 2009-2010, energy stocks like Birchcliff rose over 70%, Bonavista 60%, Crew 190% and Painted Pony 135% for just a few examples. “We expect the first cold spell of winter 2018-2019 will be a wake-up call for natural gas bears,” Schachter adds, “and a humbling experience for natural gas shorts.”
“It’s very important that investors to do their homework now,” he warns, “before that first cold spell arrives.” His best advice is for investors to learn about various energy companies, decide which ones are of most interest and determine what purchase and selling price ranges are appropriate for them.
“That’s why the ‘Catch the Energy’ Conference we are hosting on September 29th in Calgary is so vital and so timely for energy investors,” he explains. “We have 23 energy and energy service companies coming to present their stories and their success potential. It’s a unique opportunity to interact with these company executives at their booths, or the other 20 or so energy-related companies who will also be at the Conference.”
“Conferences like this are put on for large Institutional Investors all the time,” says Schachter. “We thought it was time there was one for individual investors.” Conference presenters and exhibitors include Large, Intermediate and Small Cap companies, Energy and Energy Service companies, Domestic and International, and both Oil and Natural Gas focused companies.
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Josef Schachter, CFA, is the author of the newsletter “Schachter Energy Report” and is a frequent/regular guest on BNN Bloomberg, Michael Campbell’s ‘Money Talks’ radio show, and the World Outlook Financial Conference. For more information about the conference, please see https://www.schachterenergyreport.ca/conference-2018.