The market's relentless focus on oil prices is likely distracting investors from natural gas stocks which is a shame – in many ways, they look more attractive than oil stocks.
Excess supply in the United States is a problem for both natural gas and oil markets, but the oil glut is now far more severe than for gas. The total amount of U.S. crude in storage is 524 million barrels, about 30 per cent above the five-year average. Total natural gas inventories are also above the five-year average, but only by 12 per cent.
After Encana's large foray into oil properties, there are few domestic stocks representing pure plays on the natural gas price. I used Tourmaline Oil Corp., a company that generates 94 per cent of revenue from natural gas, as a proxy for the Canadian gas producing sector.
The chart below shows the effects of U.S. inventory levels on Tourmaline's stock price. The orange line displays the year-over-year change in U.S. gas inventories and the grey line plots the year-over-year change in Tourmaline stock. Note that inventory data are shown inversely to better show the trend – a rising orange line indicates falling year-over-year levels of natural gas in storage.
The chart strongly implies that over the last five years, changes in the pace of U.S. inventory growth lead the performance of Tourmaline's stock price. From April, 2012, to the end of March, 2014, a sharp decline in inventory growth was quickly followed by a rally in the stock. A climb in year-over-year inventory growth starting in March, 2014, signalled in a severe drop in Tourmaline's year-over-year price growth starting a few months later.
Most recently, U.S. natural gas inventory growth peaked at about 70 per cent year-over-year in mid March, 2016, and fell to under 25 per cent according to the most recent data. So far, Tourmaline's year-over-year performance has yet to improve in response. But, while year-over-year returns don't look great, the stock price has managed a 19-per-cent appreciation since March 18. Previous performance patterns suggest this rally should continue and investors might just need to be patient.
There are, as always, investment risks involving adding natural gas stocks to investment portfolios. For one, previous performance trends may not hold. It was my hope that using year-over-year figures would remove much of the seasonality in the data – natural gas inventories historically rise and fall in different parts of the year – but there's the possibility that unseasonably warmer or cooler weather could skew the results.
Nonetheless, the ongoing drop in natural gas inventory levels is encouraging as a positive driver for this equity market sector. In Tourmaline's case, analysts are certainly optimistic – 12 of 14 analysts covering the stock rate it a buy.
Follow Scott Barlow on Twitter @SBarlow_ROB.