Thursday, July 8, 2010

Is natural gas bottoming?

Alberta’s government has lately reversed its stand on royalties and ‘getting a fair share’. They realized too late their mistake that low royalties are offset by high land sale prices. Albertans have paid a harsh price through a higher level of lay-offs than necessary (and to add insult to injury, this resulted in reduced income taxes). That is not say that the low gas prices by themselves would not have resulted in layoffs, but Mr. Stelmach’s energy policies have added significantly to the pain – don’t forget that consultants and contractors, i.e. those oil and gas industry workers not included in the employment statistics where disposed off as soon as the storm clouds gathered. I have friends with decades of experience who are standing by the way-side now for over 2 years; not to mention new graduates who have not been hired. New U of C geology graduates have been 90% unemployed.

But matters seem to brighten and gas demand is improving while supply is on the decline. A slowly improving economy, a warm summer and reports of underestimated decline rates of unconventional gas wells, in particular shale gas, may result in a turn-around of gas prices and with that the fortunes of the gas industry.

This will have all kinds of positive impacts on Alberta’s and in particular Calgary’s fortunes. Other areas to benefit would be Grand Prairie and NE BC’s Fort St. John. Don’t rush out with your investment dollars yet! There is still a lot of uncertainty but see it as encouraging news supporting you in holding on to your gas related investments.

If you sold off earlier the weaker investments in your portfolio like I did, you could start to nibble at some stock market opportunities. Personally, I bought some more shares in a high dividend yielding gas producer (6.8%) which likely will go up in price as well over the next year or two.

Real Estate investors should take note as well, because with improved gas prices, higher interest rates (some 6 months or a year ahead) the rental market is likely to improve as well. The combination of bottoming real estate valuations and rent increases could prove quite powerful. I wouldn’t say ‘Ready, set, go’ yet, but in my mind ‘Ready and get set’ is in my books justified.

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