T. Boone Pickens expects natural gas to average around $7 (U.S.). Here are three Canadian companies that deserve a closer look. STEVE LADURANTAYE

Thursday, June 18, 2009

Charismatic Texas oilman T. Boone Pickens talked up natural gas in a visit to Calgary this week, saying any new energy policy from the United States would inevitably be a boon to investors in Canada's vast gas deposits.

"It's going to be good for America, it's going to be good for Canada, it's going to be good for the producers, it's going to be good for everybody," he said to about 770 executives. "I can only see that the only loser in this deal is foreign oil. And I don't call you foreign. You don't look foreign."

What he didn't say is which companies investors may want to consider adding to their portfolio if they agree with his assessment – he expects natural gas to average around $7 (U.S.) for 1,000 cubic feet next year, about double where it stands right now – companies such as Celtic Exploration , Storm Exploration and Iteration Energy .

Be warned, however, not everyone believes prices are heading higher. Gas prices have been weak despite increasing crude prices, largely because of a glut of cheap new gas supply coming from unconventional gas sources.

"The ratio of gas to oil seems to argue for an upswing in gas prices," said David Baskin, president of Baskin Financial Services Inc., an investment counselling firm that manages about $300-million. "But there seems to be enough pent-up supply to meet demand without seeing a lot of movement in prices."

Celtic Exploration

Fifteen analysts follow Celtic , according to Bloomberg – and every one of them rates the company a "buy." They have an average price target of $21.14.

"Over the past several years, Celtic has shown that it is an efficient operator and that it can execute in deploying new fracturing techniques to ramp up production," said Ken Lin, an oil and gas analyst at Research Capital Corp. "With its management team and board of directors, we are of the opinion that Celtic can successfully implement its acquire, exploit, and exploration strategy to grow the company."

The company operates in the Montney shale natural gas field, which is located near Dawson Creek, B.C., and extends into Alberta. Celtic has tripled its production since 2005, and in 2008 produced about 11,000 barrels of oil equivalent (boed).

"The company's 2009 capital expenditure budget is $150-million and is expected to be financed mostly through cash flow," Mr. Lin says. "If there is a budgetary shortfall, we expect that Celtic will be able to fund it through debt or equity."

It posted a first-quarter loss of $5-million, compared to a loss of $7.4-million a year earlier.

Mr. Lin said anyone who finds Celtic intriguing should also turn their attention to Orleans Energy , which he calls "a junior version of Celtic operating in the same Montney area."

Storm Exploration Inc.

Also operating in Montney, Storm Exploration's Parkland property is seen as one of the most efficient in the business.

"In our view, the Parkland play remains one of the top-tier developments in the basin," RBC Dominion Securities analyst Michael Harvey said. "While it trades at a rich valuation relative to peers, we expect that the company will be one of the few juniors to grow production through 2009 and should perform well through the current period of weak natural gas prices."

He has a $15 price target, which he said reflects a 1.9x multiple to the company's net asset value. Other companies in the space are trading closer to 1.1x, he said.

The company made $1.25-million in its last quarter, compared to $6.4-million in the year-ago quarter. Funds from operations were $13.7-million compared to $19.52-million in the year ago quarter.

Sixteen analysts follow the company, with 14 "buy" ratings and two "holds."

Iteration Energy Ltd.

Iteration Energy owns approximately 913,000 acres of undeveloped land in Western Canada, and in the last year produced about 18,300-boed.

"They've got a good land package," said Andrew Cook, a portfolio manager at Marquest Asset Management. "With the growing rise in price of the commodity, they'll be able to bring more production on-stream in a fairly timely fashion without worrying about acquiring properties."

The company slipped to a $14.28-million loss in the first quarter on lower gas prices from a $1.6-million profit in the same quarter a year ago, while funds from operations slipped to $14.90 million from $28.51 million. Thirteen analysts follow the company, according to Bloomberg, with eight "buy" ratings and five "holds." Their average price target is $2.04.

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