I don't know the answer to that, but I do know that what we're seeing in oil is either a fire sale or a bear market. 

When I started to look at Result Energy last week, I was struck with how cheap it was.  My last glance was a year ago, and it was valued substantially higher.

I guess things are different now. 

In my analysis I was by no means using wildly bullish gas forecasts, nor was I making pie eyed optimistic production estimates.  Yet the multiple I saw said cheap and cheaper.

My first thought was to buy into this cheapness.   I held off on that, reminding myself that the real winter has been upon us less then a week, and that one week does not make a natural gas storage figure bullish. 

I continued my work, from junior to junior.  As I did a clear pattern emerged.  And that pattern was this: All the juniors are selling at quite low multiples when compared with a year or so ago.  It was as if the Calgary Tower had been mounted with a giant flashing blue light (and powered by natural gas, of course).

Now maybe this is old news to some.  As I alluded to, I haven't really followed the gassy stocks very closely since last winter, when prices hit $15 and it seemed that Stein's law must come into application at some point.  Nevertheless, this weekend as I worked through the companies, I was a little surprised by the cheapness of them all.

Below is a sample of the results of my work thus far.  This is by no means extensive and it is by no means scientific.  I am not here to try to provide exact estimates, I am here to write about what I enjoy writing about. 

I assumed $7 AECO and $55 Edmonton light for my estimates, which isn't the most bearish case, but also certainly isn't the most bulllish either.  The majority of the companies I looked at are more gassy then oily, so the AECO number is more important then the Edmonton one (Titan is the exception and I probably should revisit this with a lower Edm price for clarity).  

As well, in many of the cases the juniors had not issued guidance for 2007, so my cashflow estimate is only just that, and maybe not a good one, though I would say that if anything it is a conservative one, reflecting what I expect to be reduced budgets for the coming year.


Current Stock Price

Estimate of Forward Cashflow Multiple

Burmis 2.27 3.20
Result 0.58 3.00
Titan 2.32 1.70
C1 Energy 0.61 3.20
AltaCanada 0.45 4.40
Choice 0.57 3.20
Terra 1.05 3.00
Grand Banks 1.35 3.30

When compared against the multiples 12 months ago, there is no question that things have changed.  Clearly the market is betting on a gas price less then the current when looking ahead. 

So what sort of price is the market betting on?  A worthy question to frame a decision, because if you think the bet should be more, then it might be time to step in yourself.

A detailed look at the effect of gas price to cashflow is instructive.  I've shown this below for one of the companies I looked at, Burmis (I'm not going to show the estimates for the rest because A. this illustrates the point and B. that would be a lot of work).  The Burmis numbers are based on 3,000boe/d average production for 2007, 60% gas and a cost structure extrapolated from last year:

Price of AECO Gas

3000 boe/d Cashflow per share

Cashflow Multiple




4.00 0.41 5.59
5.00 0.51 4.49
6.00 0.61 3.75
7.00 0.70 3.27
8.00 0.80 2.86
10.00 1.00 2.29

If you believe that the average junior should be trading at a 5x multiple, which doesn't seem terribly unreasonable, then you have to conclude that the market is factoring in a forward AECO price of between $4-$5.

Whether this is wildly inaccruate, I do not know.  I am not one to say that the market is right or wrong.  Much depends on the weather, and the weather is up in the air.  What I am to say is that the market is not optimistic, that there is certainly no premium out there, and that the upward potential if gas prices rise is more then a little.