There is blood in the streets in West Texas…that means there's an opportunity somewhere.
The Covid-19 pandemic hurt oil demand, which destroyed the oil price. The fall in oil prices forced many shale companies go bankrupt. And the impact continues to spread out through the entire market.
As investors fled, opportunities opened.
For example, home values in Midland, Texas, are down 5% over the last year, according to real estate website Zillow. I expect that decline to deepen in the second half of 2020. Some friends of mine are already investing in land nearby.
But real estate isn't the only opportunity. The other is in natural gas.
The collapse in oil prices hurt oil production…and natural gas production. You can see the decline in the chart below:
Natural gas is a natural byproduct of shale oil wells. It soared over the last decade, along with oil production. It doubled in the last fifteen years, from 1.8 trillion cubic feet per month in 2005 to 3.6 trillion cubic feet per month in 2019.
That massive increase in supply sent natural gas prices plummeting. In 2005, the price of natural gas hit $14.50 per million British Thermal Units (MMBTU). In June 2020 it fell to $1.40 per MMBTU.
However, that was the bottom. And it marks the lowest natural gas price we'll see over the next decade.
The pinch in natural gas supply just began. And prices reacted, as you can see in the chart below:
The natural gas price jumped from its June low to within a penny of its highest price in 2020.
This will help gassy exploration companies. However, be careful when you do your research. There are debt bombs in this sector—companies that have a sizable chunk of long-term debt coming due.
For example, according to Bloomberg, TORC Oil & Gas Ltd. (TOG:TSX) has CA$92 million in debt due—33% of its total. And it doesn't have the cash to handle that bomb (as of June 2020, it has zero cash on hand).
However, there are some companies that look appealing here. EQT Corp. (EQT:NYSE) is a $4.2 billion explorer that produces 95% natural gas. Its trailing 12-month free cash flows are at $135 million. Bloomberg estimates that will jump to $468 million by the year end for 2020.
Another play here is Canacol Energy Ltd. (CNE:TSX; CNNEF:OTCQX), a CA$487 million South American-focused exploration company. Like Torc, it has some debt due—just 5% or CA$16.4 million. Unlike Torc, Canacol has about $49 million in the bank to deal with it. It produces mostly natural gas—94%.
If you are looking for a place to "buy low," natural gas is a great sector. The price is already rising, and companies are still dirt cheap. However, do your homework…there are a lot of companies sitting on debt bombs that can still cut share prices down.
Good Luck,
Matt Badiali
Reach Matt Badiali at www.mattbadiali.net.
Matt Badiali is a geologist and independent financial analyst. He spent fifteen years researching and writing about great investments inside the natural resources sectors. He can be reached at www.mattbadiali.net.
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