Long Term, North American Gas Stocks Might Be Worth It

Looking over the most recent crop of earnings reports from exploration and production companies, Wells Fargo analyst David Tameron on Monday said the ugly duckling that is North American natural gas equities may be worth a second look, long term.

"Given current commodity price levels, with Brent at [$125/barrel] and oil exposed stocks having already ripped, from today the best place to put money to work may be indeed natural gas," Tameron said of E&P stocks. "We think this is an easier thesis for long-term investors, who can afford to be patient, than for momentum/hedge fund money, who often can't."

The E&P names whose share prices got hit the hardest were those shifting from gas to oil and liquids, Tameron said, as the markets began to see how expensive chasing shale oil is and that wells are turning respectable but not spectacular production numbers.

"We get the feel that the 'Bakken effect,' i.e., 2,000 to 3,000 barrels of oil equivalent/day being the norm, is finally starting to wear off," he said, adding, "And investors [are] finally beginning to realize that oil production is expensive, not every well in the Eagle Ford or Permian will be, or has to be, 1,000 boe/d-plus, and strategic company shifts are difficult."

Natural gas liquids are another area where Tameron sees the simple becoming pretty complicated beneath the surface.

"All liquids are not created equal," Tameron said. Prices for NGLs could weaken in the coming months as supplies grows, while at the same time, depending on the region, there are a number of processing and transportation bottlenecks that will keep production off the market, he added.

"NGL production has many more choke points than gas or oil, each of which, if overwhelmed, could cause regional curtailments and weak pricing," he said. "If I'm an investor wanting to play E&P, and I want to put money to work today, and I have the flexibility to be looking out 12 months (realize there are a lot of "ifs" there), but why not natural gas?" Tameron asked his clients in a note. "We still think it's a little early and think any bounce off the bottom for natural gas will likely not be sustained, but if you have to or want to play the space today, we think longer-term risk/reward may be more attractive for natural gas rather than oil names," he said.

Bill Holland
Platts