But natural gas prices have actually had a strong week so far, with the rush of cold weather ushering into the east helping out on the demand side. Should investors look to names that have diversified production, including significant exposure to natgas?
Consider that the gas in storage in April was 55% below the 5-yr average. Today we sit at only 8% below the 5-yr average
There are huge amounts coming on in the NE US. Given a normal winter gas prices will be lower
But weather is the wild card
I'm very cautious on nat gas. I don't invest hoping for a cold winter. So I would avoid dry gas producing companies that are not low cost or liquids rich
I don't follow Transocean
Don't forget it is easier to forecast gas supply because it is captive to North America and does not have a geopolitical consideration
So, you’re not optimistic right now on either crude or natural gas. Are there any stock picks you can recommend at this juncture then, especially given that prices have come off so much?
I would recommend Spartan, Yangarra, DTX and RMP
Let's not forget no one is going to call the bottom. I don't think oil prices of sub $80 are sustainable
Can you provide a brief snapshot of why you like each of those four stocks pls
Spartan I mentioned earlier
Yangarra - 40% of 2015 production is hedged at $92. Using $70 oil the stock is trading at 2-2.5X (depends on other assumptions) which is a discount to peer group. And there is a suficient availability on the companies debt lines
RMP - Once again strong balance sheet. Growth is dependent on an infrastructure build out so it is lower risk. And valuation is reasonable. They too can easily survive at $70 WTI
And DTX also has a lots of room on there bank lines. They trade at a discount to the peer group. The economics of the company's two primary plays seem to be improving as management gains a better understanding of the reservoir and optimizes completion techniques
Let's touch on other commodities. What's your outlook for both gold and the main base metals?
Gold is a USD denominated trade. It has recently broke through some critical technical levels and the outlook is to the down side.
The average all in cash costs for the industry is $1200 so it is tough to imagine an environment where we stay below that level for an extended period of time
So I'm focused on low cost producers with clean balance sheets
Long term I am bullish on gold. Given all the printing that has occurred will eventually drive inflation, which should be good for gold. The million dollar question is when
Zinc - I am constructive on because 10-15% of primary mine supply will be depleted within the next few years. And there is no new large tonnage targets that are being developed that will be mined over the next number of years
It is tough to get equity exposure to Zinc. One name I own is TV (Trevali Mining Corp). They have a producing mine in Peru and a development project in New Brunswick. Interesting to note that TV's partner in Peru is Glencore
Copper - I have a bearish bias because of new supply coming on stream and the potential of weakening demand out of china.
China accounts for ~60+% of consumption
Teck's peformance is going to be driven very much by China because of Teck's exposure to coal and copper. So it depends in your outlook on China. I'm not a China bear but I do think growth is slowing which will impact steel demand and by extension you could see weak coal prices for awhile
I spoke to SPE earlier in the chat. I very much like this name.
BBI is a cheap option on the Montney in and around NVA. They are drilling there first well and if they are successful this could be a real winner. But it is quite speculative
I am not too familiar with MDI but given continued cuts in mining capex budgets I would be cautious
Pertinent to a discussion on any commodity is the direction of the US dollar. It's rally is not showing any signs of ending soon. What's your outlook for the greenback?
I'm not a currency guy but obviously it is something we watch closely here. The outlook is very bullish. For the first time in a number of years we are seeing diverging central bank policies. The Fed appear to be becoming more hawkish while BOJ and ECB are going down a dovish path. This means that the USD will likely continue to strengthen
Talisman is doing horrible today, down by more than 10%. The company said it may take writedowns on its UK North Sea assets in the fourth quarter. There’s talk the company may have to make more asset sales, and I see Gimme Credit, a ratings agency, downgraded its rating today to -1 (and that hardly sounds good). What’s your view on the company?
Not one I follow closely but it looks like they are in no mans land. The buy and hold investor has lost interest now they are losing the attention of the event driven investor. This is a name that I have avoided and will continue to avoid
Unfortunately BXE has over promised and under delivered for the past number of months. The company has negatively revised guidance on multiple occasions. SO they will be in the penalty box for a little while. They reported last night and revenue was below expectations because of a higher gas weighting. The reason for the misses are very reasonable and they are putting in fixes to address the variability in production. But for the time being the market is unforgiving. Especially give the mood in energy
OK, time for just one last question.
IMG recently announced the sale of Niobec and because of this they have a stellar balance sheet. Mining costs need to come down. Because of the balance sheet strength this company can survive low gold prices. But some of their operations are cash flow negative at current gold prices. It is a name that I do not own
Thanks Jason. We need to wrap, but before we let you go, any final thoughts or recommendations for our audience today? The floor is all yours.
Buy quality companies with a long term thesis in mind. Try not to let your emotions cloud your judgement. Times like these are buying opportunities for INVESTORS who have a reasonable horizon. Thanks everyone for your time. Good luck in this tough market.
Thanks Jason. Probably not your happiest moment in time as a fund manager in resources, but one that may open up opportunity in the future.
Thanks to all for joining us. We hope you found this useful.
See you back here next Tuesday at 1pm for our next chat.