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Natural gas prices, based on the benchmark AECO hub in Alberta, are up 3 per cent since the start of the year.TODD KOROL/Reuters

The oil sell-off is unduly dragging natural gas equities with it, creating some value opportunities among some gas-heavy producers, according to some industry analysts.

Since June 10, West Texas intermediate crude oil prices are down about 18 per cent in Canadian dollar terms, and about 13.6 per cent for the year. But natural gas prices, based on the benchmark AECO hub in Alberta, are actually up 12 per cent over that same time period, and up 3 per cent since the start of the year.

This, according to TD Securities, has brought with it indiscriminate selling pressure on the energy sector in general.

"The disproportionately large sell-off of gas companies relative to … forward AECO [natural gas] prices creates an interesting buying opportunity," TD said in a recent note. Since June, oil-weighted equities and natural gas-weighted equities have declined a comparable 46 per cent and 39 per cent, respectively, it said. One example of a natural gas stock affected by oil's misery is Advantage Oil and Gas Ltd., TD said, noting about 97 per cent of its production is natural gas. The stock has declined about 18 per cent since June.

Kyle Preston, director of oil and gas equity research at National Bank of Canada in Calgary, believes that not all natural gas equities have unduly been punished. Some of the better-positioned gas-weighted names have been trading at "fair-to-rich" valuations for the year, he said.

"If we look at the AECO gas prices, we're relatively flat year-to-date, whereas a lot of these gas-weighted names are trading down anywhere from flat to 30 [per cent] to 40 per cent down," Mr. Preston said. "But you really have to look at it on a company-specific basis.

"Any of the gas-weighted names that have underperformed the group have underperformed for reasons other than just the sector selling off," Mr. Preston added. "They may have balance-sheet issues; they may have a shrinking production base."

There are often other broader issues at play as well, notes Mr. Preston. They include competition rising from U.S. producers that may be reducing their market share, and delays in West Coast liquefied-natural gas projects. Going forward, there's another concern for the natural gas sector. The El Nino weather phenomenon could introduce a warmer-than-usual winter in some parts of the country, which could hurt the natural gas sector as heating demand is reduced. "We get another warm winter in the eastern part of the continent, that's never, ever good for gas prices," Mr. Preston said.

Nevertheless, the broad energy sell-off comes right in time for September, which – according to TD – is natural gas's best-performing month. For those investors considering value plays in the sector, the bank highlighted companies that are most weighted to natural gas and relative insensitivity to WTI pricing, along with low debt. It recommended ARC Resources Ltd., Advantage Oil and Gas, Painted Pony Petroleum Ltd., Peyto Exploration and Development Corp., Pine Cliff Energy Ltd. and Tourmaline Oil Corp.

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