Rock–Bottom Values in Natural Gas

07/01/2009 1:00 pm EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says a Canadian natural gas pipeline company offers investors good growth and a fat dividend at a depressed price.

Our focus this summer and for the rest of the year remains on building positions in bombed-out natural gas. There’s no other commodity this depressed, this unwanted, and trading at such distressed levels.

Natural gas prices remain 70% off their 52-week high, and historically, the oil-to-gas ratio signals a major buy for natural gas with the spread [of] crude oil to gas at 17.5. That’s a huge spread.

I’ve never made a recommendation riding a commodity or resource company at or near its highs—never.  I prefer to buy depressed blue-chip companies or individual commodities that are in the gutter or trading at attractive discounts to their historical highs. And now, natural gas is the contrarian commodity speculation in the world.

This week, we’re adding a [new] position in North America’s largest natural gas pipeline operator—TransCanada (NYSE: TRP).

TRP owns 36,500 miles of natural gas pipelines, most of which transport gas from Alberta to the eastern US and Canada. Roughly 50% of all the natural gas produced in western Canada is brought to market vis-à-vis TransCanada pipeline. The company also generates a significant chunk of its revenues from wholesale power generation, with 10,900 megawatts on aggregate as of May 31st.

The pipeline business is stable and dependable. Gross margins and operating income have consistently improved this decade, and the dividend has grown by more than 25% over the last ten years. The stock price [rose] more than eightfold before peaking in 2008–and that’s before rich dividends.  

At a current 4.9%, the stock’s dividend [is] almost twice the yield on the Standard & Poor’s 500 Index. Even better, TRP is a Canadian company, and I’m very bullish on the Canadian dollar versus the American dollar.

In a tough global economy, TransCanada [is] a blue-chip stock that is dependable while now offering some growth potential following the near completion of its first phase of the Keystone pipeline–a $12-billion-dollar project that will eventually carry 1.1 million barrels of oil sands crude a day from Alberta to refineries in the US, Midwest, and Gulf Coast.

As natural gas prices eventually recover, demand will grow for TRP’s services or the transportation of gas. Not too many companies can deliver natural gas because of significant regulatory barriers that constrain competition.

[At just below $27 Tuesday,] TransCanada trades 31.5% off its 52-week high of $39.31 and 37% below its all-time high last fall before the September-October global crash. The stock trades at 13.9x trailing earnings, pays a fat dividend in Canadian dollars, and will rally sharply once depressed natural gas prices get off the ground. This is a great stock for all investors.

Buy TransCanada Corp. in New York up to $30. If you’re a Canadian, then go ahead and buy the company in Toronto under the symbol TRP.TO. As always, we’re placing a 20% stop-loss on our entry price.    

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