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This is my first post ever, anywhere.

I have been reading the posts on this site for the last year or so. 

This is by far one of the best resources I have used. Thanks to all on this site for their insightful comments.

I have been investing in natural gas for the last several years in an energy trust called Peyto (pey.un on TSE). In hindsight this may have been outside my circle of competence or I was just early . I am down ~ 50%.(ouch!)

 

my back of envelope thinking:

-low cost operator. Apparently has the lowest cost in the industry. On recent conference call CEO reports that company would make money with nat gas at <$2.

-currently yielding ~16%. Earned last quarter’s pay out despite low nat gas prices thanks to hedging.

-has natural gas reserves that are valued at ~$26 per share(998 Bcfe ). Shares trade at $9.18. Once economy recovers, especially if we start using electricity to run our cars I am hoping that price will approach price of $26. Get paid(16% currently) while you wait.

-seems to be well managed. I like managements commentary on the industry in their monthly letter to shareholders on their website. Managers have sizable stock in the company-info available on their website (peyto.com).

 

latest quarterly report:

http://www.peyto.com/news/Q22009PressRelease.pdf

Negatives:

- former CEO was selling +++ shares this past spring.

- They sold more unit trusts earlier this summer (if they needed money I would have rather they cut the dividend)

 

I started buying several years ago when I noticed the high cost of heating and cooling my home with natural gas. I thought it would be a way of hedging my costs (probably foolish thinking at the time).

 

Any comments/insights would be appreciated.

 

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Does anyone have a way to play the price of Nat gas? I am not interested in the companies...the spot price is crazy. One way I have heard used is to short the bear etf...this has not worked out so far but would likely work eventually.

Any thoughts?

 

Dazel.

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The 12M curve is about $2 higher than the spot right now, which is historically pretty high.  That curve has also been in a bottoming process since April (recent lows on 4/27) and has made higher highs and higher lows since then.  It still remains cheap compared to the past few years, but NG was between $1 and $2 for much of the 90s.

 

 

Much will depend on whether we build more NG power plants, and NG cars & trucks.  For right now, the price is probably too low but playing it profitably is not a given imo due to the strong contango already mentioned on this thread

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Gas-t

 

Does GAS-t accurately track the price of the gas index over long periods of time?  I seem to recall that some other ETFs have suffered substantially from volatility and have failed to track their index.

 

  My advice is spend at least 48 hours investigating the intracacies of any etf commodity play particularly the levered etf,s. The smart hedgies just short both sides of the the bull and bear commodity etf's and eat the speculators capital, the contango which is very steep right now is another factor which can quickly eat up your returns these things generaly are poison to the ill informed. That said I am also very interested in gas plays and I am interested in anyones ideas out there. T. Boone is right ,Nat gas should be a major transportation fuel in N.A. It makes way more sense than gasohol. Just mandating truckers convert to Nat Gas would do wonders for balance of trade.
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I like the MLPs that Klarman was into. EVEP being my favorite followed by BBEP and LINE. Most have hedged gas at $6-$8 for a few years.

 

The CEO of EVEP sees $2 gas after labor day which should be interesting. Gas storage is also at an all time high but, 50% of the rigs have dropped off. Something has to give but not sure when things will turn.

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Oh and personally I have and would take a hedged bet. Look for something which gives you little pain over the next few years regardless of natural gas prices and great upside on any number of events.

 

Long term gas will be valuable. But short term we have far too much of it and its becoming an unprofitable product for unhedged producers, (this is great long term, the cure for low prices is low prices). I like the offshore drillers (ESV being my favorite and the best run, no debt and growing), and hedged producers who can still make a profit with $2 gas. I also like producers with oil and gas exposure. They can drill oil for now and turn on the gas when prices improve. 100% gas is a concern for me. $75 oil is very profitable for most producers.

 

Prices will turn and revert back to $6 - $10 gas. We have hybrids, drastically reduced rig count, cold winter, hot summer, and no LNG imports and potential exports over the next few years. The trouble is when, and will your producer of choice survive (watch debt levels).

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Contango has some terrific webcasts and presentations on their investor relations page. I found them fairly absorbing to listen and read.

 

http://www.contango.com/investor/events.htm

 

From the presentations you get the impression the CEO is aware of capital allocation and psychological failures of human decision making. He kind of reminds me of the Henry Singleton of natural gas.

 

I have attached 2 presentations. One was given on 2007, where MCF talks about the effect of Black Swans and hunting for Black Swans. The other was given in 2001 where MCF gives the "101" of exploration and production companies.

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Praetorian Value Fund likes MCF.  Their valuation follows:

 

http://seekingalpha.com/article/149248-victor-fasciani-likes-contango-oil-gas?source=yahoo

 

-$1.3B or $78/share intrinsic value of proved reserves only (based on net present value of after-tax income assuming $7 per Mmbtu natural gas price and $70 per barrel of oil)

-Other assets and free options add up to an additional $30-40/share (MCF bought more than 70 lease blocks in the Gulf at $35M cost basis; Victor thinks this is worth $100M today because of seismic data and the company's successful drill track record of 67%)

 

 

Also, they have $50 million left on their stock buyback.  This could reduce S/O from 16.5 million to 15.4 million shares.  They are scheduled to drill another prospect in November at a cost of $15 million and one in early 2010. 

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Success in onshore shale reservoirs has dramatically increased the gas reserves in N America.  These reserves can be developed and produced for much less than $7/mcf so I wouldn't count on a long term price above $4 or $5.  That said, the decline rates are very high and with seasonable demand variations the price should be volatile.  But there is no self discipline among the producers and I can't see how it will average more than the marginal cost to produce and develop over the next decade or so.  Chesapeake usually provides some good insight in their presentation material.

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzQ2NTMwfENoaWxkSUQ9MzM2MTYyfFR5cGU9MQ==&t=1

 

See pages 21 and 22

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Guest kawikaho

The ratio between NG and oil has hit a 19 year high.  I wonder how the regulation of the commodities ETF's will play out with the futures prices.  Anyways, I'm more inclined to believe that oil will finally tank (thank god) vs. NG rallying.  Infact, I really hope oil tanks.  The correlation between oil spot prices and the stock indexes is really troublesome, and pisses me off.  Nothing makes me more upset than this.  If this correlation continues, well, bring on $200/barrel oil and 1500 S&P!  Thanks for bailing us out, ding bats. 

 

 

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The ratio should be 6 to 1 based on energy and has usually been 10 to 1. It is for sure out of wack but, long term oil should and will rise (we arent making much more of it and more importantly the stuff left is harder to produce). Barring electric cars driving up power usage the fundamentals for natural gas dont look good to me in the medium to short term and should be great in the long term.

 

Right now we are drowning in it and it can be produced quickly and cheaply.

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  • 4 weeks later...
Lots of debt, however good quality assets that produce income. Should be able to ride the storm out and see natural gas prices rise.

Way undervalued.

 

I've owned it since higher, and it's a great (but risky) value here.  Note their costs, and note their pricing is in Alberta (AECO).

 

Also note the massive dilution to the tune of 200% the other day. :)

 

Ben

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Lots of debt, however good quality assets that produce income. Should be able to ride the storm out and see natural gas prices rise.

Way undervalued.

 

I've owned it since higher, and it's a great (but risky) value here.  Note their costs, and note their pricing is in Alberta (AECO).

 

Also note the massive dilution to the tune of 200% the other day. :)

 

Ben

 

What's the difference with AECO pricing vs. say Henry Hub (or whatever it is on Nymex)?

Anyways, the way I see it it's a bit like a call option. Key thing is gas prices will it go up? If so this should be a winner, or at least the protection of capital.

 

The massive equity offering that is dilutive was at $1.29/share somewhere.

They've had bids for a takeover in 2008 somewhere at $10 a share. Obviously they won't fetch that now, but even $3-$4 is good.

If you value their mining assets at say 70% of the current 2B now, and take away all the debt ... "net-net" ... the company is still worth about $3 bucks.

:D

 

 

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What's the difference with AECO pricing vs. say Henry Hub (or whatever it is on Nymex)?

 

A lot... depending on many factors.  Often more than $0.50/mcf

 

Anyways, the way I see it it's a bit like a call option. Key thing is gas prices will it go up? If so this should be a winner, or at least the protection of capital.

 

I agree with everything but the last part.

 

The massive equity offering that is dilutive was at $1.29/share somewhere.

 

Well, it was for 1 share, plus 1 two year option @ $1.55... so it more than tripled the share count on a diluted basis I believe.

 

They've had bids for a takeover in 2008 somewhere at $10 a share. Obviously they won't fetch that now, but even $3-$4 is good.

 

Cite your source. :)  They attempted to sell when they were in the $10-12 range, and the process took nearly a year, and they didn't get any bids they found reasonable.

 

If you value their mining assets at say 70% of the current 2B now, and take away all the debt ... "net-net" ... the company is still worth about $3 bucks.

 

The disount on the assets appears quite large, I agree.  You are in a race against time on the 2013 notes though.  New CEO appears sharp, but I'm not adding here.  I though may be biased against action since I took such a big bath on this one.

 

I still own common shares.

 

Ben

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Gas prices in Alberta should do okay from here on in.

see here: http://www.energy.gov.ab.ca/NaturalGas/1322.asp

 

Back in recession of 2002, prices got down to about 2.5 ... then rose up as the economy turned to about $3-4.

In 2008 it got up to $9!!  :o :o

 

I'm gonna stick with this one, maybe a small position.  ;) Ha! Good on me for finding this. 

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