Got Natural Gas?
Next
time you're schmoozing around at a neighborhood barbecue, will you know
what to answer when someone asks: "Which is the better investment, oil
or natural gas?" Well, your answer should be an unqualified 'Yes'. As the
interrogator looks bemused, you can then expand upon your brilliance.
In the unnecessarily complex world
of petroleum investing, oil is the sizzle while natural gas represents
the steak. By 2020 demand for natural gas will have outstripped that for
other types of resources as the annual usage is expected to balloon to
around 33 Tcf (trillion cubic feet) from the 2000 figure of 23 Tcf. That'd
be an increase of almost 50 percent. Since natural gas is used-more and
more-- in electricity production, that means that the small increase in
usage seen historically during the summer months will continue to rise
resulting in a smoothing of the cyclical nature of natural gas. Whereas
usage generally spiked in the colder months and the summer months were
used to replenish supplies, going forward (I hate that term) demand will
cease to be cyclical; the need for the commodity will become year round.
Damn Statistics 
Oil prices are subject to various
global geo-political events-as if I had to tell you that. Natural Gas reserves
are quite robust with current estimates of 5,000-plus Tcf's globally. Of
this the US has around 3 percent, while the Middle East has around 34 percent,
etc. The US gets 84 percent of its Natural Gas domestically, 15 percent
from Canada and the balance elsewhere. Usage breaks down to 42 percent
industrial and 22 percent residential, with the balance used for other
commercial entities and electricity generation.
One of the largest producers of oil
and natural gas in the world is EnCana Corp (ECA:
NYSE). The Canadian-based company has a $15 billion market cap
and produces, per day, 3 Bcf (billion cubic feet) of gas and 250,000 barrels
of oil. Further, the behemoth boasted 9 trillion cubic feet of North American
natural gas and 980 million barrels of conventional oil and NGL (natural
gas liquids) reserves at year-end 2002. That gives you some perspective
of how the heavyweights operate. In the weeks to come, we'll begin
to investigate small cap outfits.
Black Gold, Texas Tea and more of it
Over the past few years, technology
has played a critical role in oil and gas production. Researching this
piece, I noted that Sun Microsystems (SUNW:
NASDAQ) has a division that caters exclusively to the technology
needs of the petroleum sector. Over the next ten years, improved technology
is expected to increase world oil reserves by 125 billion barrels, and
lower capital expenditures, as companies become wired to squeeze more product
and savings out of their operations. EnCana will spend $3.3 billion on
capital projects in 2003-flat against 2002. Better technology means, as
well, that marginal fields and those in far-flung places such as West Africa
become more viable. Lower costs, more production, growing market-ya gotta
like that.
EnCana is projected to earn $3.11
for fiscal 2003 (as at December), so with a current share price of $31.40,
the price/earnings ratio is a compelling 10 times. That said, the key to
successful oil and gas investment is to buy a company with a good mix of
oil and gas-the sizzle and steak-that generates a good cash flow, which
is the filter through which most investors view the viability of oil and
gas company.
Cash
Flow runs through it
Always look at cash flow when considering
an oil and gas investment. Encana generated $8.71 per share of cash flow--evidencing
a price to cash flow (p/cf) of about 4 times. The higher the number, the
greater the risk. Anything below a 5 times p/cf is very respectable.
As we explore the resource area,
we will continue to refine our thinking and look for small cap companies
that have potential to grow and flourish in the long term. Junior or small
cap companies with a combination of oil and natural gas assets tend to
do extremely well when matched with savvy management that aggressively
exploits the latest technologies to cut costs, find new reserves and increase
production.
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