Major bull run ahead for natural gas?

Key Concepts

• Fiscal Stimulus: Government spending and tax cuts designed to stimulate economic activity.
• LNG (Liquefied Natural Gas): Natural gas cooled to a liquid state for easier transportation.
• MCF (Thousand Cubic Feet): A unit of measurement for natural gas volume.
• All-in Sustaining Costs (AISC): The total cost of producing an ounce of gold, including operating costs, capital expenditures, and sustaining capital.
• ADR (American Depositary Receipt): A certificate representing shares in a foreign company traded on a U.S. stock exchange.
• Small Modular Nuclear Reactors (SMRs): Nuclear reactors that are smaller and designed for factory fabrication, offering potential benefits in cost and deployment.
• Free Cash Flow Yield: A financial ratio that measures the free cash flow a company generates relative to its market capitalization.

Market Outlook & Investment Opportunities – John Wilson, Nine Point Partners

Economic Overview – US vs. Canada

John Wilson, Managing Partner at Nine Point Partners, outlines a positive economic outlook for both the US and Canada in 2024. The US economy is demonstrating strong performance, driven by robust productivity growth, particularly in the fourth quarter of the previous year. The labor market remains healthy, with jobless claims remaining below 200,000. He acknowledges potential disruption from the upcoming US election cycle, stating the economy "looks great subject to whatever Trump might do over the course of 2026." Canada’s economy has also proven more resilient than initially anticipated following the implementation of tariffs, partially due to negotiated relief measures. While not as strong as the US, the Canadian economy is considered “okay.”

Precious Metals – Continued Bull Run

Wilson identifies precious metals as a continuing investment opportunity. He attributes this to several factors: widespread fiscal stimulus across developed economies leading to growing fiscal deficits; central banks increasing gold reserves while de-emphasizing the US dollar; and a significant margin between the current gold price and the all-in sustaining costs for producers. He notes the current gold price is “over $4,500 an ounce.”

Specific Recommendation: Kinross Gold

Kinross Gold (KGC) is highlighted as a “low risk way to play the sector.” The company’s US-based properties have all-in sustaining costs ranging from $1,500 to $1,700 per ounce, creating a substantial profit margin given the current gold price. Wilson emphasizes this makes Kinross a “really low risk, good producer.”

Natural Gas – A Buy-the-Dip Opportunity

Despite recent underperformance compared to the broader energy sector, Wilson believes natural gas presents a “buy the dip” opportunity. The price has fallen from $4.50 per MCF in early December to $3.00, a 30% decline. He argues that the marginal cost of production is around $4 per MCF, limiting potential supply growth. Demand, however, is expected to increase by approximately 3 BCF per day due to expanding LNG capacity in the US and Canada. The recent price drop is attributed to a warmer-than-usual start to winter in North America. He anticipates a price rebound above $4.

Specific Recommendation: Expand Energy

Expand Energy is recommended as a key player in the natural gas sector. It is the largest natural gas producer in North America, possessing 20 years of proven reserves. Its production is strategically located near key demand centers, including LNG facilities in Texas and data centers in New York. At a natural gas price of $4 per MCF, the company offers a 14% free cash flow yield, making it an attractive investment following recent price declines.

Power Generation – A Growing Theme

Wilson identifies power generation, encompassing generation, distribution, and backup systems, as a compelling investment theme driven by the increasing demand from data centers.

Specific Recommendation: Rolls-Royce (UK)

Rolls-Royce (RR.L), the UK-based engineering company (distinct from the automotive manufacturer), is highlighted as a particularly interesting opportunity. The company operates two primary divisions: jet engines for wide-body aircraft and a roughly equal split between defense and power generation. The power generation business grew by 25% last year. Crucially, Rolls-Royce is a leader in the development of Small Modular Nuclear Reactors (SMRs), having been selected as the technology provider for projects in the UK (three reactors), Czech Republic (shortlisted for six), and Sweden. Wilson notes the company is experiencing earnings growth in the mid-to-high teens and benefits from long-term contracts providing revenue visibility.

Central Bank Rate Cuts – The Key Question

Wilson frames the central question for the markets in 2024 as whether central banks have completed their interest rate cuts. This overarching theme underpins the analysis of various investment opportunities, as it influences commodity prices, economic growth, and overall market sentiment.

Logical Connections

The discussion flows logically from a broad economic overview to specific sector and company recommendations. The rationale for each investment is clearly linked to macroeconomic trends (fiscal stimulus, central bank policy) and industry-specific dynamics (LNG demand, gold production costs). The emphasis on “buy the dip” opportunities suggests a tactical approach, capitalizing on temporary market corrections.

Notable Quote

“It’s a low risk way to play the sector…It’s got producing properties in the US that are running all in sustaining costs anywhere from 15 to $1700 an ounce, with gold at over $4,500 an ounce. That’s a great spread.” – John Wilson, regarding Kinross Gold.

Conclusion

John Wilson presents a cautiously optimistic outlook for the North American economy, identifying specific investment opportunities in precious metals, natural gas, and power generation. His recommendations are grounded in detailed analysis of industry fundamentals, company financials, and macroeconomic trends. The core message is to focus on companies with strong fundamentals, favorable cost structures, and exposure to growing demand drivers, while remaining mindful of the overarching question of central bank policy.