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Harry Koza

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Gassing up

Harry Koza

 TORONTO (GlobeinvestorGOLD)—I must admit to being a little nonplussed when Globeinvestorgold.com asked me for a stock pick for this issue of Trade by Numbers. "You want me to pick a stock that I like? Surely, you jest," I told the editor. "You might as well ask me to throw a dart at the stock page in the Globe, given my history of picking stocks. I mean, I've hated stocks since, oh, 1998 or so, and try as I might, I just can't seem to get too humpy about the stock market yet. Besides, I'm a bond guy—we don't know from stocks. But I'll try to find one that I like."

I thought about the request for a weekend. Finally, I had to admit that there is an equity sector that I like, and thus there are companies in that sector that I like, or as brokers on Bay Street like to say, there are stocks "that we own and therefore recommend you buy."

I am still quite bullish on natural gas, and thus also on EnCana Corp. I own a gaggle of mostly gas-heavy income trusts, and have even been adding to my holdings lately, both through dividend reinvestment plans and outright cash purchases. And EnCana, which I've owned since it was Alberta Energy Corp, is the biggest single equity holding in my portfolio. It is also the biggest independent natural gas producer in North America. (View EnCana's most recent earnings report.)

You've probably noticed your gas bills going through the roof in the past year or so, especially if you didn't bother to lock in your gas supply at a long-term fixed-rate when those nice door-to-door marketers came by a few summers ago. This past winter, the first traditional Canadian Winter™ in recent years, gas demand for heating shot through the roof. Oil prices soared, too, mostly on nervousness about Iraq, and problems in Venezuela and Nigeria. But while oil prices have eased from their highs and will likely drop further, gas prices are still high.

All that cold weather across North America has drawn down gas storage reserves to their lowest levels since the mid-nineties. As of this writing, U.S. gas storage was at 684 BCF (billion cubic feet), according to my futures trading buddy, Contango Bob, or even lower, at a recently quoted level of 623 BCF (according to recent figures in The Globe and Mail). The previous low was 693 BCF back in 1996.

And with U.S. gas production declining, and demand still growing, it would not take much to keep reserves low heading into next winter, which means strong prices. Gas has become the fuel of choice for electricity co-generation plants, and the booming housing construction market here and in the U.S. has meant the continual addition of thousands of new gas (and electricity) customers. Gas-fired co-generation plants are increasingly the favoured mode for meeting peak electricity demand. All it takes to put further pressure on gas storage reserves is a summer heat wave, and we're usually good for a couple of them every year. And as Environment Minister David Anderson and David Suzuki and all the other Kyoto Protocol boosters keep telling us, 11 out of the 10 hottest summers in history have occurred in the past nine years (or something like that—these weather statistics can get a bit nebulous).

OK, so the U.S. has low storage, declining production, some extra local demand, but surely, here in Canada, we have gas up the proverbial yin-yang, don't we? Well, actually, we don't. We normally have 140 BCF in storage at this time of year, but only 83 BCF this year. And you may remember that big gas field in Ladyfern, B.C., announced with so much fanfare a year or so back? Turns out it hasn't got nearly the amount of natural gas many thought. There was even a story in the papers last week about new plans to build liquefied natural gas (LNG) terminals on the east coast to handle imports in order to meet our coming shortages.

One thing about LNG, though: pound for pound, it's hundreds of times more explosive than dynamite, so the prospect of having a supertanker full of the stuff anchored off Halifax or St. John's harbour may meet with some resistance from the local communities, which likely means that bringing these facilities on line will take about as long as it takes for the Leafs to repeat a Stanley Cup win.

Seriously, though, natural gas is the fuel of the near-future, the transition fuel to the hydrogen economy, and ultimately oil producers in the Middle East will stop burning it off and start transporting it by pipeline and LNG tanker to Europe, Asia and the Americas. In fact, given Canada's remarkable expertise in gas gathering systems, pipelines and other oil infrastructure technologies, we should perhaps think of ways to contribute those skills as our contribution to rebuilding Iraq.

So all in all, I like the prospects for natural gas. If it's cold in the winter and hot in the summer, not an outrageous bet, gas prices will be firm. Large-scale imports of LNG are years away, as are pipelines to the high Arctic. Clean burning natural gas is the preferred fuel for electrical generation these days, and our electricity consumption keeps rising. And natural gas prices do not depend on how much OPEC member countries cheat on their quotas.

All these things bode well for companies in the gas biz, which brings us to EnCana. The company pumped an average 2.76 BCF/day in 2002, and an estimated 3.0 to 3.1 BCF/day for 2003. In 2002, EnCana increased its gas sales by 16 per cent from 2001, to 2.76 BCF/day, and increased its reserves to 9 trillion cubic feet of gas, plus it has 980 million barrels of conventional oil and natural gas liquids reserves. It also has a vast land position, with 17 million net undeveloped acres in North America and 77 million net undeveloped acres offshore and internationally. It operates the largest independent natural gas storage network in North America, with 145 BCF of capacity and the ability to draw down 2.7 BCF a day. And, while the stock never really reacted to the news, the company not long ago announced it had discovered a new billion-barrel oil field in the North Sea, on leases that had been given up by a major international firm as being uneconomic. The company has a strong balance sheet, with debt at 36 per cent of capital. Total shareholder return in 2002 was 19 per cent.

Now, on the globeinvestor.com Web site, it says shares of EnCana are rated 2 on a scale of 1 to 5, based on analyst recommendations, with 1 being a strong buy, and 5 being a strong sell. That's not a raving endorsement at current prices, but it's not bad, either. So, if you wanted a position in EnCana, you'll want to buy the stock on dips. I think that if gas prices stay robust, and I think they will, companies such as EnCana should make out like bandits. And if storage levels rise, well, they'll do all right on their big storage capacity, too.

Bottom line, this is a stock that I have owned for several years and will continue to hold for a long time to come. I also really like several gas-heavy income trusts, but I'm only giving one pick here. Doubtless there are other gas plays out there that you may want to have a look at, too. Besides, I'm a bond guy, so all this stock stuff isn't really my thing anyway.

Most importantly of all, I must confess that back in the early 1980's, during my brief involvement in the oil patch, I was known by others in the "awl bidness" by the accurate, if unflattering, sobriquet, "Dry-Hole Harry," so you may want to keep that in mind when you consider any oil stock suggestions I make.

Harry Koza is Senior Analyst in Canadian markets for Thomson Financial/IFR. At various times in his career, Mr. Koza has been a prospector, metallurgist, project manager, engineer, as well as an institutional bond salesman for 15 years. His current area of expertise is in high-yield distressed securities and corporate bonds in general.

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