A Clean Play on Natural Gas

04/07/2009 1:00 pm EST

Focus: STOCKS

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says the largest natural gas producer in Canada offers good exposure to a fuel that’s selling at very depressed prices.

Based in Calgary, Alberta, Encana (NYSE: ECA) is Canada's largest natural gas distribution company based on stock market capitalization and natural gas production.

ECA produces approximately 4.4 billion cubic feet of gas equivalent per day. More than 80% is natural gas—the cleanest burning of all fossil fuels. Natural gas is still the optimal burning fuel, [which is] important because of the rising tide of environmental legislation and its relative abundance compared to crude oil.

Encana is the best way to play natural gas because of its huge revenues, leverage to natural gas prices and now, the sharply declining number of operational rigs in Alberta this year.

Natural gas prices have collapsed a cumulative 70% since last summer as demand has declined amid a global industrial slump and previously robust production. But now storage supplies are declining and the number of gas rigs in production has plummeted.

According to Baker Hughes (NYSE: BHI), a major oil-services company based in the United States, gas rigs [are] down 47% from their peak of 1,606 last September. As gas prices have swooned over the last eight months, companies have scaled back expansion plans, cut production, and closed more than 750 rigs.

Historically, natural gas and crude oil tend to shadow each other. If oil prices are running hard this month—closing above $51 recently—then perhaps natural gas might be at the cusp of an equally impressive rebound. A sharp decline in operational rigs does suggest an imminent rally is likely, especially with prices so depressed.

Though it's hard to make a bullish case for domestic gas consumption this summer as consumers and companies cut demand, the odds of a major price spike occurring has risen markedly now that net supplies are declining following big production cutbacks.

My first choice is to buy Encana listed on the NYSE and traded in US dollars. As I expect the Canadian dollar to rally on the heels of rising energy prices [in] the second half of 2009, then ECA will get a lift because it's quoted in American dollars.

If you're adamant about owning the Canadian dollar then you can also buy Encana in Toronto (TSE: ECA.TO).

The stock currently pays an effective yield of 3.6% and trades a whopping 56% below its all-time high. You can't argue with the value at this price. (It closed Monday above $44—Editor.)  

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