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Shares of natural-gas producers aren't exactly running out of, well, gas. But they aren't shooting up to their peak levels, either -- despite sharply rising oil and gas prices. Consider Chieftain International (
CID), for one: Its stock is trading at 18 a share, down from 22 in mid-May. But this Canadian-based company, whose operations are largely (96%) in the U.S., may be "one of the best natural-gas pure-plays around." So says Rosario Sal Ilacqua, the veteran and highly respected oil-and-gas analyst at New York investment firm Monness, Crespi, Hardt. Chieftain's operations are concentrated in the Gulf of Mexico, offshore Louisiana, and Texas.
Considering the company's rising earnings and cash flow, healthy balance sheet, and prospects for increased gas production in the second half of the year, Chieftain is trading below its intrinsic worth of 30 a share, says Ilacqua. It's also unlike most independent exploration and production companies, which usually are burdened with heavy debt. Ilacqua says Chieftain has a low long-term debt of $15 million, a working-capital balance of $6 million, and shareholder equity of $277 million.
Ilacqua believes that natural-gas prices, currently at $4.45 per 1,000 cubic feet (Mcf), may well stay above $4 as they have during much of the past few months. "It is very possible that a very tight natural-gas market could develop in the coming months should we get a very cold winter season," he adds. That will create, he says, additional upward pressure on the price of gas. The need for increased exploration and production is shown by the drop in natural-gas reserves, says Ilacqua. The analyst notes that the amount of natural gas in underground storage in the U.S. has dropped 17% this year, to 1.92 trillion cu. ft., way down from last year's 2.31 trillion cu. ft.
NEW DISCOVERIES. Also high on Chieftain is C. Van Levy of CIBC World Markets, who rates the stock a "strong buy." With three new discoveries this year, production growth is assured in the second half, when eight new fields will go into operation. Drilling results have been good, notes Van Levy, with a 56% success rate in the first half. The company plans to drill 30 wells in the Gulf of Mexico and south Louisiana this year. And the cost of finding gas at Chieftain, notes Levy, has dropped to 84 cents per Mcf, vs. $2.03 in 1998.
Despite the turnaround in production and costs, Chieftain's share price has trailed that of its more high-profile peers. The stock is very inexpensive, he figures, judging by its price-to-cash-flow and price-to-earnings multiples.
Based on Levy's cash-flow estimate of $4.26 this year, the stock is trading at a 3.9 multiple. And based on estimated 2001 cash flow of $4.87, it's trading at a 3.5 multiple. The analyst expects Chieftain to earn $1.03 a share this year and $1.10 in 2001. The company was in the red in 1999.
With all its good drilling successes in the U.S. and prospects for increased output, Chieftain could well be the hot stock for the coming cold season.
Senior Writer Marcial has been writing Business Week's Inside Wall Street column for 18 years. Catch his online column every Tuesday afternoon
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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