Recently, I was looking at E&P natural gas companies in Alberta. I have been following natural gas prices at Station 2 and the AECO hub closely for about 8 months now and working to understand some of the issues producers are facing when trying to get their gas to markets. I have been particularly interested in the evolution gas production has undergone.
Majority of gas production used to be in the lower SE part of Alberta and has migrated the the NW (Motney) region. This evolution, coupled with TransCanada Pipelines changing their NGTL restriction methodology has resulted in extreme price volatility and historically low prices for Alberta producers. NGTL used to cut into Firm Receipts in the NW part of the province, reducing supply onto the system but still keeping markets “whole”. This supported gas prices somewhat because the markets had to compete for the limited supply coming onto the system (simple economics). They came to the conclusion that they should not be cutting firm service that customers have to pay for no matter what. The decisions was then made to cut Interruptible Transmission deliveries off the system instead, essentially cutting the markets (Empress, ABC and Storage) while keeping firm receipts “whole”. The result was increased supply which basically put the Alberta gas market into a constant over supplied state and cut all deliveries into storage which acts as a sort of buffer, preventing large price swings.
Above is a very simplified crash course on some of the problems Alberta natural gas producers are facing. The point I am trying to make is that the outlook for companies like Painted Pony (PONY.TO) or Birchcliff Energy(BIR.TO) appears to be very grim at first glance. I wanted to do some more digging and decided to look up some basic financials on Reuters Finance (since Google Finance is now trash).
Here are the ones that interested me:
Price to Book: 0.33
EPS for 2017: 0.36 (Positive is the main take away)
EPS Growth 1yr: 317%
Obviously, these are three ratios provide limited information however I thought there was an interesting contrast compared to the company Canopy Growth Corp (WEED.TO) which has been generating a lot of hype and trading volume lately:
PE: Negative earnings… might as well be 500x as far as I am concerned.
Price to Book: 7.87
EPS Growth 1yr: -59%
I understand these companies are in different industries and are facing much different outlooks with potential legalization and all but here are my thoughts….
PONY.TO is a gas producers which has been recording positive earnings and has improved their bottom line and hedging strategy to function in the current low AECO price environment. The company is trading at a very modest PE and book value which I think reflects the outlook on the future of natural gas markets where no significant NGTL expansions will probably take place until 2020. This stock is largely unpopular and there is not capital flowing into this type of investment even though it may look like a “value” stock to some. Not sure how I feel about it yet but more research will be done.
WEED.TO is a speculative weed stock gaining love from the masses based on the thesis that once marijuana is legalized this company will be well positioned to capitalize on the recreational market. The stock is trading at astronomical PE and loses money per share. The company is not profitable and does not appear to be close to becoming profitable soon. Another thing that worries me about this stock is the investors it is attracting. If I had to take a stab at the demographic it would be as follows:
18-30 Male, first time/ newer investor, limited finance background, someone who thinks the intelligent investor is a person not a book, marijuana user?
Maybe I am a pessimistic person by nature but I never think things in the future are going to turn out so much better than expectations… look at the latest Star Wars movie (utter trash).
Bottom Line: I don’t think WEED.TO is going to change Canada one blunt at a time, but maybe I will be eating humble pie (stoned) in a years time.