Natural Gas today is at $2.312 per MMBtu, well down from January’s 2019 high of $3.722 but bouncing back a bit after hitting a three-year low on June 16.
Over the past two years, we have owned shares of four of Natural Gas companies in our Natural Resource portfolios: Devon Energy (DVN), Encana Corporation (ECA), EQT Corporation (EQT) and Gulfport Energy Corporation (GPOR). We also have held shares in NFX Newfield Exploration Company; however, in February 2019, Newfield was acquired by Encana and is no longer a consideration for investment.
A week ago, based on what we believe may have been a long-cycle low for Natural Gas prices, or somewhere close to it, we started looking for a Natural Gas producer for our Natural Resources portfolios.
Admittedly, our anticipation in recent years that Natural Gas equity prices would stay close in trend to the whole Oil & Gas field has been unjustified. But as Natural Gas is a cleaner fuel and the growing global economy needs fuel of all types, there is no basic reason why the price differential should persist. In any case, we like to buy into cyclical weakness and sell into strength, although our choices are based on relative corporate fundamental strength. To support our investment decisions, we reviewed the finances and operations of 12 leading Natural Gas companies in North America.
Using fundamental screens from Thomson Reuters and Williams Market Analytics, we discovered that Montage Resources (MR) is superior today in many ways. Based on June 14 data, we rated MR a Strong Buy on Value, which is not surprising; but we also found MR to be rated at Strong Buy for Growth. In fact, the Analysts’ Consensus Estimate for the company’s sales growth is projected at +27.6% through 2019. And, the 2019 EPS increase is now higher by +26.1% to $2.66.
About 10 days ago, on Tuesday June 18, we took an entry position at $6.75 in MR, which btw is a PE of just 2.5 of our entry cost. The natural gas futures at that moment were trading at US$2.33. The natural gas price dipped the next day to $2.27 but despite this negative futures action, MR stock had moved to a high of $7.13 on Thursday, a gain of +5.6% for MR in two days. Our initial impression soon soured, though, as the natgas futures price then plunged to $2.16, which caused the stock price to plunge to a low of $5.85 on June 25. The extreme volatility on June 28 took the MR price from a hi-low of $6.22 and $5.86 to a close of $6.10.
That kind of volatility is the nature of capital market risk in today’s market. However, it also underscores our belief in investing based on relative corporate fundamentals. Over the long cycle, the strongest companies are the survivors and likely among the market winners.
Briefly there are 13 fundamental ranking criteria that we reviewed using June 14 data for about 5100 companies.
We then compile the already massaged data into what we refer to as composite scores for Growth and Value and apply buy and sell ratings for all the stocks we have under study.
Fundamental Rankings:
1- Revenue Growth, which is based on the evolving turnover of the company between the last year and the three coming years according to consensus estimates. The higher the growth is (from a relative viewpoint), the better the rating is. The goal is to rank companies according to estimated sales and to identify companies with the highest growth.
- Winners: MR is the best
- Losers: SWN, GPOR and EQT are wors
2- Revenue revisions (one year), which is based on the evolving revenue revisions of the company for the current fiscal year and the next one. The more revenue estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best revenue estimates. The difference is that the period is three times as long as Revenue revisions (four months).
- Winners: MR and AR were by far the best
- Losers: CHK
3- EPS revisions (one month), which is based on the evolving EPS (earnings per share) revisions of the company for the current fiscal year and the next one. During the last week, more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates.
- Winners: None were remarkable
- Losers: CHK by far the worst
4- EPS revisions (three months), which is based on the evolving EPS (earnings per share) revisions of the company for the current fiscal year and the next one. During the last four months, more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates. The difference is that the period of observation is based on fourth month instead of one week.
- Winners: MR and AR were by far the best
- Losers: CHK by far the worst
5- Valuation, which is based on the ratio between enterprise value and its turnover for the current fiscal year and the next one. The lower the valuation is, the better the rating is. The goal is to rank companies according to valuation and to identify companies with the lowest valuation
- Winners: MR is best followed by AR. SWN, GPO and SBOW are also solid
- Losers: COG is worst for several reasons
6- Finances, which is based on the evolving net debt of the company (debt or cash) and its EBITDA, compared to its revenue. The higher the cash is, the better the rating is. The goal is to rank companies according to financial situation and to identify companies with the highest growth. The goal is to rank companies according to the quality of their financial situation.
- Winners: None are exceptional
- Losers: None are exceptionally bad either. CHK is possibly the worst
7- Profitability, which is based on net margin of the company for the current year and the next one according to consensus estimates. The higher the ratio is, the better the rating is. The goal is to rank companies according to the “Net income/revenue” ratio to identify those which have a high payoff.
- Winners: All are considered good. SBOW, COG, ECA, MR and GPOR are probably the best
- Losers: CHK possibly the worst of the lot but is still good across the universe of 5100 stocks
8- Price Earnings Ratio, which compared the company’s current share price to its per-share earnings for the current fiscal year and the next one. The lower the PER is, the better the rating is. The goal is to rank companies according to their earnings multiples and identify those which are considered cheap.
- Winners: MR and SBOW received the maximum score
- Losers: WPX, CHK, DVN and COG received the lowest scores, but all these were not bad
9- Yield, which is based on the dividend relative to its share price. The higher the dividend yield is, the better the rating is. The goal is to identify companies that can supply a significant dividend return to their shareholders.
- Winners: ECA was by far the best, but still not one we view as a Yield stock
- Losers: Several pay no dividend
10- Consensus, which is based on analyst recommendations. It provides an indication of the position taken by most analysts polled by Thomson Reuters. The goal is to identify companies that benefit from the maximum of buy (or sell) recommendations.
- Winners: WPX
- Losers: CHK and SWN
This Quantitative data is studied for outliers that may reflect risks or opportunities that should be explored further from an investment perspective if we are sufficiently interested. That work requires the study of corporate presentations and Management Discussion & Analysis (MD&A) from the EDGAR (SEC) and SEDAR (OSC) databases.
For the target company, which in this case is Montage Resources, we summarize our findings. We acknowledge that the MR Risk Score is a 5 (worst) and the Relative Price Trend is down. We consider MR to be a Non-Yield Stock, but we also rated it a Strong Buy for both Growth and Value considerations.
In our case study, it was the hard data that this week led us to taking an entry level position in Montage Resources in the Natural Resources portfolios we manage. To this point, the relative price trend of the stock is down, which mitigated against taking a larger position. However, if the commodity price does improve, we expect the equity price to also improve and we may then add to our weighting of MR or possibly another of the Natural Gas-weighted stocks that we study.