Pieridae Energy: Call option on the price of natural gas (TSX:PEA:CA)

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HJBC

Natural gas is used for electricity generation, heating and cooking. Natural gas is also very important for the production of fertilizers and food. Since the war between Russia and Ukraine began, the supply of natural gas has been interrupted and both Nord Stream 1 and 2 are out of service. East it has put enormous pressure on supply to Europe, which can now be felt in other parts of the world, such as North America.

There is currently an arbitrage opportunity between EU natural gas and US natural gas (Henry Hub). This gap is expected to close with LNG supplies coming online as the US sells more natural gas to the EU.

energy prices

Correlation economics

Another arbitrage can be found between Canadian natural gas AECO and US natural gas Henry Hub. This gap is also expected to close as pipeline infrastructure projects are implemented over time. This makes me very optimistic about AECO prices going forward because not only do we benefit from the increase in Henry Hub prices, but we also benefit from the AECO-Henry Hub distortion. To reproduce this bullish case, we look at Pieridae Energy (OTCPK:PTOAF).

AECO Gas

Bloomberg

Summary

Pieridae Energy is a natural gas producer with light oil as a by-product (80% gas/20% liquids). The company is located in Alberta, Canada and produces 37,500-39,500 boe/d of product.

As the largest producer of the Foothills in North America, its assets constitute some of the largest conventional natural gas fields on the continent. Our footprint extends over one million gross acres of land (807,000 net acres); with ownership of three natural gas plants and more than 3,800 kilometers of pipelines in Alberta and British Columbia.

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Pieridae Advantage includes a commitment to net-zero emissions by 2050, a veteran management team with extensive upstream and midstream experience, and the core elements needed to advance an LNG project off Canada’s East Coast.

share structure

The float is very tight compared to its peers with only 158 million shares outstanding, which has caused problems for institutions to gain a sizeable position.

Valuation

The following image shows the price of natural gas (AECO) at $5 CAD/GJ for November 1, 2022.

AECO Gas Price

AECO Portal Alberta

The outlook for natural gas prices looks promising. AECO natural gas could reach $8 CAD/GJ within a few years.

AECO Gas Outlook

EDC, NGX

Based on this pricing perspective, Pieridae Energy’s valuation is shown below based on a 5X EBITDA multiple. The chart shows that the company is trading at a very cheap valuation. The company also has a CAD$700 million tax pool to tap into and has low capex requirements thanks to low 8% decline rates.

Energy assessment of Pieridae

Pieridae energy gain reports

Note that Alberta’s natural gas price has been correcting for a while due to a lack of pipelines. TC Energy, the operator of these pipelines, is working on improving this infrastructure. By Q3 2023, the NGTL 2021 system expansion will be complete and by Q4 2023, NGTL West Path Delivery will also go into production.

TC Power Pipeline Project

CT Energy

In the last week of October, TC Energy reported good news. A major expansion on a 344 km long pipeline has already been completed and is in service. This news pushed up the price of AECO.

NGTL project update

TC Energy Newsletter

Coverages

A large part of PEA production was hedged by low natural gas prices earlier in the year, but as the image below shows, the hedges are now fading. The timing couldn’t be better with regards to the geopolitical tension surrounding natural gas and as we head into winter prices will be even better. Please note that the netback will greatly increase as these hedges are removed. With hedges, the company will post a net income of approximately CAD$100 million at CAD$4.5/GJ of natural gas, which corresponds to a P/E ratio of 2. Imagine what the profit will be with higher natural gas prices and less toppings. At these prices, the company should also be able to comfortably service its debt obligations ($200 million Canadian dollars in debt). Any increase in AECO’s price above $4.5 CAD/GJ will significantly speed up this debt repayment process. It is worth noting that this debt carries a very high interest rate (20%). When this debt is paid off, profits could increase by $50 million Canadian dollars per year, providing huge financial leverage.

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Energy cover Pieridae

Pieridae energetic presentation

Technical analysis

The chart below shows the double support at the 200 EMA and it has now broken above the top. With plenty of bullish catalysts regarding the macro outlook for natural gas, the technicals here look beautiful, setting up for a massive bull run.

Pieridae Energy Stock Price

TradingView

risks

Delays in pipeline construction, pipeline maintenance work, and natural gas price falling below $3 CAD/GJ will make it difficult for the company to service debt, although the tight share structure could be used to attract smart money. New hedges with higher prices could ensure a solid price floor.

conclusion

Pieridae Energy has a large influence on the price of Canadian AECO natural gas. Pipeline infrastructure improvements are scheduled to be delivered in 2023, which will give the price of natural gas a fundamental floor. Regarding the geopolitics related to natural gas, we assume that the war between Russia and Ukraine will not come to an end in the near future, which will support natural gas prices. Recently, Qatar’s energy minister told the EU that a price cap on Russian natural gas would cause them to cut off natural gas supplies to the EU. Tensions regarding natural gas are rising around the world and also keep in mind that we are heading into winter which will push natural gas higher.

The timing to enter this trade could not be better as hedges are fading and prices are rising due to geopolitical tension. In addition, the pipeline expansion will drain storage and drive up natural gas prices.

This company is a buy and wait. The market is currently waking up to this gem.

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