HOW TO PLAY WEAK NATURAL GAS ENVIRONMENT IN CANADA

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

However, the team highlighted what they consider a troubling development: the continued softness in Canadian benchmark AECO natural 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 ahead of the usual storage build in April.

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

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

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

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