How to play the weak natural gas environment in Canada

Energy analysts at TD Securities are pretty pleased with the current gains in oil prices, particularly simply because they designed a contrarian call in February and told clients to overweight the sector because US$30 per barrel crude doesn’t make much sense.

However, they highlighted what they think about a troubling development: the continuing softness in Canadian benchmark AECO gas prices.

The source of the weakness is excess supply and sluggish demand. This helped drive gas storage levels in Alberta higher in February, well in front of the usual storage build in April.

TD also noted that storage levels in eastern Canada are hitting record highs, which makes it more difficult to absorb the surplus from Alberta.

As an effect, analyst Aaron Bilkoski recommends that investors shift their focus to gas companies with reduced exposure through hedges, low cash costs, and versatile balance sheets.

Advantage Oil & Gas Ltd., Bonavista Energy Corp., NuVista Energy Ltd., Peyto Exploration & Development Corp., Painted Pony Petroleum Ltd., Tourmaline Oil Corp. and 7 Generations Energy Ltd. all rank highly on those metrics.

“Alternatively, those companies without these attributes risk income dipping in to the red, reductions to reserve-based credit facilities in the looming spring review, equity issuances, and the inevitable capital budget reductions,” Bilokski told clients.

“Even if NYMEX proves strong and carries AECO prices upwards, we’d still favour the gas names with the most hedging, highest margins, and most balance sheet flexibility.”