Energy, Energy Service, Natural Gas &amp; Oil Sectors

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Top 660. Aug 26, 2001 7:09 PM

» lcha - Roudntable Part 2

The TSC Energy Roundtable
By Christopher Edmonds
Special to TheStreet.com
Originally posted at 11:59 AM ET 8/25/01 on RealMoney.com

This is the second part of Chris Edmonds' TSC Energy Roundtable. To return to the first part, click here.

TheStreet.com: Doug, you were bullish on oil and gas prices in December. How do you feel now?

Doug Hohertz: Clearly, short term, the situation has changed but in the longer term the fundamentals are the same. Over time, we will continue to see tighter supply and demand fundamentals for crude and natural gas. What we see right now -- especially in North America -- is significant contraction in demand.

Hence, we have a short-term situation with gas that will work itself out in the next six to 12 months, depending on whether this winter, and fundamentally on a longer-term basis, we are going into a period of tighter supply and an upward bias in prices.

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TheStreet.com: Bryan, at the last roundtable, while bullish like everyone else, you showed skepticism. Even the skeptical view proved a bit rosy compared to today's reality, but you did use the words "hard landing." Is this the hard landing?

Bryan Dutt: We certainly got the hard landing. The market is the most humbling mechanism I know of, and the market knew more than the collective wisdom of individual analysts. The market saw that gas prices at $5 were untenable and they priced the stocks accordingly. You had a market that proved wiser than us as individuals.

TheStreet.com: Marshall, last time we were together, you were talking about the beginning of the ascent of the energy cycle. We have descended dramatically and you've changed your price forecasts materially in the past three months. Are we closer to the top or the bottom?

Marshall Adkins: I think we're closer to the bottom. That said, on the gas front, we are really, really concerned over the next two or three months. There is just too much gas out there. Until you start to see demand come back or a negative supply response, it's going to be hard to rebalance the gas equation. Short term, we continue to be very bearish.

A lot of that has been factored into the stocks. Fundamentally it has, but psychologically the stocks could still go lower. We will probably see the worst of it in the next three months.

TheStreet.com: Is it fair to say this OPEC cut is the last easy cut for the cartel? Is it fair to say that any additional cut would be darn difficult to enforce? Even if demand falls further?

Doug Hohertz: If we were to see a global slowdown continue to worsen, you will eventually see the consuming countries put enough pressure on OPEC to lower that target price.

Dan Pickering: If the U.S. economy doesn't rebound as people expect toward the first half of next year, there is not a chance in hell you will hold crude over $25. It won't matter what OPEC does.

TheStreet.com: What's your forecast for crude prices, say, at the end of 2000? And then, let's say 12 months from now?

Marshall Adkins: I think we'll be pushing $30 by the end of the year and then will probably deteriorate over the next several years. But I think crude will bounce around between $25-$30 for the next 18 months or so.

Dan Pickering: Crude is $27 and change today. In the fourth quarter, I would say around $25, but that's not a big change, given the recent volatility in prices. I'll assume an economic recovery in the first half of next year. And I would say prices will remain flat through the first half of next year.

Bryan Dutt: End of the year, $28.50; toward the second half of next year, $22.

Doug Hohertz: I think we could drift higher toward the end of this year, say $29-$30 range, especially if OPEC can hold firm with its production cuts. Next year, we taper off a bit, probably $25-$26 range.

Tyler Dann: We are at $26.25 for the fourth quarter and $23.50 for next year. That said, we are becoming a bit more bullish for next year, so the bias is higher.

TheStreet.com: Marshall, at the last roundtable you were touting $8 natural gas. Is that a thing of the past?

Marshall Adkins: Funny things happen when you have an unfettered market and you see those outlying prices, whether high or low. I think that's what we have learned: When you take prices up that high you get into a no-man's land regarding demand fundamentals.

Could you go back up to those highs? Yes, but it would be very short-lived. Conversely, you could also see sub-$2 gas but that would also be very short term. I think the longer-term range will be $3.50-$5.50 going out several years. I don't think you will see a sustained move much higher.

TheStreet.com: What about the impact of increased coal and nuclear power generation? Has that had an impact on the natural gas markets?

Marshall Adkins: What has really crushed the gas markets in the past two or three months is that the supply of coal and nuclear power has reduced the demand for natural gas-fired generation. The summer demand for gas is not nearly as robust as we thought it would be at the beginning this year.

Dan Pickering: In the second quarter, our rough numbers show that industrial demand was down 21% year over year. That is a fallout of a weak economy and $10 gas prices that worked their way through. Bottom line: Any time you see commodity demand down 20% year over year, you will have a noticeable price impact.

I do view this as a demand issue, with the supply of alternative fuels being a real issue at $10 gas, but becoming less important as gas prices moderate.

TheStreet.com: At what price and when will gas prices reach a bottom -- and where will natural gas prices be a year from now?

Marshall Adkins: We have no idea where they will bottom because if demand goes away there's no reason we couldn't see gas prices below $2. However, our official forecast is $2.50. Picking an exact number will be tough.

Twelve months from now? We are looking at an average price next year of about $3.50, which means you see a pretty steep ramp in gas prices throughout the year.

Dan Pickering: $2-$2.50 for a bottom in gas prices, with $3.50 for next year.

Bryan Dutt: $2.29 for the bottom and $3.50 for next year.

Jeff Dietert: One thing we now know for sure after those predictions is that gas won't be at $3.50 next year. But my numbers aren't any different.

Doug Hohertz: The downside depends on demand, so it's hard to predict, but the $2-$2.50 range sounds reasonable. Next year, I would say $3.75, largely because of power demand. I don't think you will repeat the nuclear and coal displacement you saw this year and you will see additional gas-fired generation in 2002. So, we could certainly see it go above $3.75.

Tyler Dann: The low will be around $2.28, just to go a penny lower than Bryan. And we are at $3.25 for next year.

Marshall Adkins: You do need to point out that even though we have a fairly bearish consensus short term, that isn't what the futures market is saying, it is suggesting quite the opposite. That is interesting.

Doug Hohertz: Last week's 3 billion cubic foot withdrawal is probably the first indication of something we'll begin to see in the future: light draws or very small injections during very hot summer weeks, a result of the increased use of natural gas to fire peaking power generation.

TheStreet.com: Are we facing a power glut?

Jeff Dietert: We don't see one right now. Industrial demand is down 6%-10% and we're still setting record peak days, 5%-7% above levels we have ever seen. There is still plenty of demand, even without the return of industrial demand, and prices have been very volatile.

TheStreet.com: Bryan, are you playing any of these names?

Bryan Dutt: I'm short Calpine. I believe that the long-term market mechanism will result, over time, in a power glut. I think that's inevitable. And that would suggest Calpine is a disaster in the making. They have $28 billion in engineering and construction projects in the works right now. I think it was a great conceptual story two years ago, but there are several ways it could blow up.

Otherwise, I think just about everything Dan said is right. However, these stocks seem to trade almost in step with natural gas. Right or wrong, if people are bearish on natural gas, these stocks will follow and, if bullish, the same holds true. And I think the short-term feeling on natural gas is somewhat bearish.

Doug Hohertz: Looking a little longer term, I think you can make money in these stocks and I would consider Williams (WMB:NYSE - news - commentary - research) and, if you can stomach the political heat, El Paso (EPG:NYSE - news - commentary - research), which is very, very cheap.

TheStreet.com: Does the Devon Energy (DVN:Amex - news - commentary - research)-Mitchell Energy (MND:NYSE - news - commentary - research) deal last week portend anything for additional consolidation in the exploration-and-production business?

Bryan Dutt: I think it's just another in a series of combinations that will have occurred and will continue to occur in the sector.

TheStreet.com: If that's the case, who is next?

Bryan Dutt: Well, for my sake, I hope it is Cross Timbers. There's a list of probably 10, 15 or 20 names that are mentioned as possible takeovers. Companies like Cross Timbers, Burlington Resources (BR:NYSE - news - commentary - research) is a large name that is often mentioned, Ocean Energy is a hot name of late, Louis Dreyfus Natural Gas (LD:NYSE - news - commentary - research) is another.

Doug Hohertz: Western Gas Resources (WGR:NYSE - news - commentary - research), Evergreen (EVG:NYSE - news - commentary - research), all of your basin gas plays. The Powder River Basin has been a hot place to play. These types of deals are indicative of how difficult it is to grow production without acquisitions.

TheStreet.com: With the equity market as sloppy as it is, individual investors are again seeking income as a part of their equity portfolio. Are the pipeline partnerships a place where individual investors should look for stability and income?

Marshall Adkins: We think it's very good place to be and we're putting a lot of emphasis on them. Names like El Paso Energy Partners, Inergy (NRGY:Nasdaq - news - commentary - research) and Enterprise Products Partners (EPD:NYSE - news - commentary - research) are names on which we would focus.

Tyler Dann: One royalty trust that has always looked interesting is Hugoton Royalty Trust (HGT:NYSE - news - commentary - research), with properties operated by Cross Timbers. While we do not follow them formally, it's a company worth a look for investors

-- posted by lcha

Top 661. Aug 26, 2001 7:47 PM

» JenL_2 - Re: Roudntable Part 2

In response to message posted by lcha:

Lcha - Good find! They've all changed their Bullish Oil & NG tune since last Dec and now seem to be a little bearish short-term but bullish on the Oil & NG sector long-term. Some seem to like the E&P and/or Service companies, and some want to play it safe with Big Oil. Lots of food for thought. Thanks for posting it....Jen

-- posted by JenL_2

Top 662. Aug 27, 2001 2:26 PM

» lcha - insider buying

CNBC reported today that this past reporting period "ENERGY" HAS THE LARGEST "INSIDER BUYS" in some 20 years.

Another ray of hope in a sea of bleakness.

-- posted by lcha

http://biz.yahoo.com/rb/010826/business_...

Top 663. Aug 27, 2001 5:13 PM

» Sinewave - Re: insider buying

In response to message posted by lcha:

Icha,
Here's the article from Yahoo.

-- posted by Sinewave

NG & Oil Stocks Watch List

Top 664. Aug 27, 2001 10:01 PM

» JenL_2 - Energy ETFs, Indices & Watch List

Time for an update:

Let's take a look at how the Energy Select SPYDRS fund (XLE) and the ishares Trust Dow Jones US Energy fund (IYE) are doing:

<img src="http://chart.neural.com/servlet/GIFChart..." width=450 height=250>
XLE, IYE, S&P500, Nasdaq 1 YR Chart

How about the Major Oil Company (OIL) and Oil & Gas (ONG) indices:

<img src="http://chart.bigcharts.com/industry/bigc..." width=527 height=316>
OIL, ONG, S&P500 3 YR Chart

.....Jen

-- posted by JenL_2

Top 665. Aug 28, 2001 7:09 PM

» Rande - Re: Low gasoline Prices

In response to message posted by Kirk:

Some kind of weird, isolated, local price-war going on in Fresno according to the reports I've seen. Meanwhile, unleaded gas futures have spiked to levels of two months ago. API report tonight showed a dramatic dip in gasoline stocks, even though crude stocks exceeded expectations. So far, we've been spared somewhat in CA as the supply "difficulties" have mainly impacted the midwest (Chicagoland is right up there with the Bay Area when it comes to misery at the pump). At least NG is well below $3 for the time being and the serious talk now is that CA will have energy surpluses within the next two years. Can't have everything. smile

-- posted by Rande

Top 666. Aug 28, 2001 7:16 PM

» JeffChristy - Re: Low gasoline Prices

In response to message posted by Kirk:

Kirk
Here is a website that gives gas prices by zip code. You can use 93701 as a zip code for Fresno.
US Gas Price Watch
:http://www.gaspricewatch.com/USGas_index...

-- posted by JeffChristy

Top 667. Aug 28, 2001 8:22 PM

» Karin_ - Compared

Compared to the coastal gas prises, Fresno prises are low. I have never checked into it, and can not
tell you, why this is.

Will find out tomorrow.

-- posted by Karin_

http://www.maverickenergy.com/fundamenta...

Top 668. Aug 29, 2001 12:33 PM

» lcha - oil drilling primer

If anyone is interested, the following link is a great primer to the basics of the science of finding hydrocarbons. It has nice pictures so I will just post the link.

-- posted by lcha