Legendary New Brunswick oil (and everything else) magnate K.C. Irving’s three sons were both affectionately and derisively known as Oily, Gassy and Greasy. Seasonality financial analyst Don Vialoux’s use of the term “gassy stocks” reminded us of them. Would that Mr. Vialoux’s natural gas stock picks achieve the success of the Irving clan.
Whether the weather is hotter or colder than usual, it pays to invest in natural gas, but beware the trap of direct gas investment, says seasonality-based financial analyst Don Vialoux. Based in the Greater Toronto Area, Mr. Vialoux co-founded popular investing-related websites timingthemarket.ca and equityclock.com with his son and fellow analyst, Jon.
The elder Mr. Vialoux explains that in historical terms, the price of natural gas and “gassy stocks” tied to the commodity perform best from the end of August until the third week of December.
Much of the increase in natural gas use and corresponding bullishness on gassy stocks is due to buildings requiring more heat as the seasons change. However, this year, a spell of hot, humid weather across the eastern parts of Canada and the United States kicked off greater natural gas demand to power air conditioners right from the beginning of the historic period of seasonal strength, says Mr. Vialoux.
Inventories low at start of high-demand season
What’s more, natural gas inventory levels are already the lowest they have been for about a decade, he adds. Meanwhile, the advent of hurricane season opens up the possibility of production shutdowns at gas platforms in the Gulf of Mexico. Any interruptions in natural gas production in the area would drive prices (that of the commodity as well as those of related companies) upward. The already-low natural gas inventory would amplify any supply issues and the degree of consequent price hikes, the analyst further argues.
Despite his faith that natural gas will follow its typical seasonal trajectory, Mr. Vialoux specifically cautions against buying natural gas outright. Instead, he recommends buying gassy stocks and related exchange-traded funds as his ‘best buys’.
“There’s a lesson to be learned here. It’s a structural problem with the commodity futures as opposed to a problem with the commodity itself,” the analyst explains. Futures contracts have specific monthly expiry dates. This in turn greatly limits traders’ ability to cash in during the seasonally strong period at a favourable price point. Mr. Vialoux says, in effect: “The commodity has much more, shall we say, implied volatility in it.”
An ETF to buy for US gas play
For exposure to the natural gas industry in the United States, the analyst recommends buying shares of the First Trust Natural Gas ETF (NYSEARCA—FCG). The ETF tracks the ISE-Revere Natural Gas Index, which is made up of a basket of US energy stocks that have a heavy emphasis on natural gas. Even so, all of the ETF’s constituent companies, including Devon Energy Corp. (NYSE—DVN), Cabot Oil & Gas Corp. (NYSE—COG), and even Encana Corp. (TSX—ECA; NYSE—ECA) have major energy-related interests beyond natural gas.
4 gassy stocks to buy for Canadian gas play
For exposure to Canadian natural gas, “it’s probably best to buy a basket of gassy stocks to play this trade,” says Mr. Vialoux. “I guess the most well-known gassy stock in Canada is Encana.”
The analyst concedes that opposition to pipelines and other energy infrastructure could dampen gains among natural gas-related Canadian companies. On the other hand, he asserts that a Kitimat, BC liquefied natural gas (LNG) export plant and attendant pipeline, proposed by a consortium led by Royal Dutch Shell PLC, is much likelier to succeed than, for example, the Trans Mountain pipeline, given healthy First Nations and other local support.
“If Shell announced it would go ahead with this project, that would be a positive thing for a lot of the gassy stocks.”
Aside from Encana, some potential buys north of the border include Advantage Oil & Gas Ltd. (TSX—AAV), Bonavista Energy Corp. (TSX—BNP), and Peyto Exploration & Development Corp. (TSX—PEY).
“These are all gassy stocks that have been kind of going sideways for the last couple of months,” says Mr. Vialoux.
Looking at the economy and markets more generally, the analyst says: “Certainly, the US markets have momentum right now. The earnings picture continues to be very, very strong for the large cap companies in the US.” Among S&P 500 companies, earnings rose an average of 25 per cent year-over-year in the second quarter, and the market expects them to rise 20 per cent in the third quarter and 17 per cent in the fourth quarter.
By comparison, Canadian markets peaked on July 13 and have stayed fairly flat since. Mr. Vialoux says that in earnings terms: “The news (from Canadian companies) has been good but it needs to be very, very good for it to continue helping market upside.”
This is an edited version of an article that was originally published for subscribers in the September 21, 2018,, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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