The natural gas market experienced a period of oversupply from April 2011 to April 2012, causing prices to fall over 50%. However, lower prices have since spurred increased demand and reduced supply. Natural gas production is expected to fall as drilling activity declines due to reduced investment in dry gas. In the long term, liquefied natural gas export projects are moving forward to export North American natural gas to markets with prices over five times higher. Undervalued natural gas companies pursuing export opportunities may provide long term investment opportunities.

1. august 2012
cardinal
update
Dividend Increases
Saputo Inc.
(During the period: July 1 – 31, 2012)
10.5%
The Inevitable Swings of Natural Gas COMPANY FOCUS
Natural gas, like other commodities and stock markets, can move in one direction for an Wells Fargo
extended period of time. Unfortunately, during these times, some analysts and investors Wells Fargo is the largest U.S. financial institution
believe that this one direction will last forever and will not change. From April 19, 2011 to by market capitalization at $179.1 billion, and has
April 19, 2012, NYMEX natural gas prices fell from $4.26/mcf (per thousand cubic feet) over $930 billion of deposits and $1.3 trillion in
to a low of $1.91/mcf. The warmer winter we had diminished the demand for gas. This was total assets (USD). Over the past twelve months,
combined with increasing supply from shale plays and created an oversupplied natural gas the bank has earned over $17 billion and has
market. U.S. natural gas inventories bulged to a level 60% above the five year average. redeployed these profits back to shareholders by
This situation is not sustainable. Lower prices spur demand and reduce supply. Utilities are raising its annual dividend by 83% to $0.88/share
switching from coal to the cheaper, cleaner burning natural gas. From the beginning of (a 2.6% yield) and by repurchasing 144 million
the year to the end of May, data from the EIA shows that electricity generated from natural shares since Q1 2011 (out of an authorized 200
gas increased by 36% versus last year; whereas, coal demand fell by 20%. This has whittled million share repurchase plan).
away the excess inventories to just 14% above the five year average. Prices have responded Despite earnings headwinds from regulations
accordingly, rising over 50% from the April lows. and low-interest rates, Wells Fargo has been
The buck does not stop here. Companies have rapidly redeployed investment away from dry able to continue to drive profits higher through
gas and towards oil and natural gas liquids. The Baker Hughes U.S. natural gas rig count – integration of Wachovia’s operations (purchased
an indicator of drilling activity –has not been this low since 1999 when US natural gas in 2008 with integration completed last quarter),
production was 30% lower than it is today. The pullback in drilling will cause supply to fall acquisitions of loan portfolios from troubled
once a backlog of already drilled wells has been worked through. European financials ($7.8 billion of loans acquired
year-to-date), reductions in funding costs,
Longer term, liquefied natural gas (LNG) projects backed by large multinational and state reductions in expenses, and strong mortgage
oil companies are moving forward to export natural gas out of North America. While the banking results ($131 billion of mortgage
market currently punishes firms with natural gas exposure, companies pursuing LNG export originations last quarter, estimated to be over 30%
facilities such as Shell, Petronas, and PetroChina are acquiring undervalued assets in North of the market). This multitude of available earnings
America. Natural gas prices in Asia are more than five times greater than those in North levers will help the bank continue with strong
America incentivizing companies to build world-class export facilities. LNG exporters need profitability during uncertain economic times.
to secure long term, stable supplies of natural gas from places like British Columbia. These
are the foresighted buyers when the nearsighted market is selling. This is the time we want Cardinal Capital Management, Inc. does not guarantee the accuracy or completeness of the
to be buying companies with positive long term fundamentals at great prices. information contained herein, nor does Cardinal assume any liability for any loss that may
result from the reliance by any person upon any such information or opinions. The information
and opinions contained herein are subject to change without notice.
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