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Raymond James: Industry Insiders More Bullish Than Wall Street

Many energy industry insiders currently are forecasting that gas and oil prices will wind up being higher than current Wall Street estimates in 2005, analysts at Raymond James & Associates said based on an informal survey of energy companies at the recent North American Prospects Expo in Houston.

"We conducted a survey of about 40 energy executives regarding what they really thought natural gas prices would average in 2005," said Raymond James' Wayne Andrews. "The group's average forecast was $6.52/Mcf, with a high of $8.80 (!!) and a low of $4.90. This compares to current First Call consensus of $5.93."

Some industry consultants, however, including Denver-based Bentek Energy, are predicting that natural gas production will rise this year because of strong drilling performance and that natural gas prices at many locations will slip to less than $4 by the end of the year. The federal government expects domestic natural gas production to increase 1.7% in 2005 and predicts that gas prices at the Henry Hub will fall 5% to an average for the year of $5.77.

Andrews said the average oil price forecast from the Raymond James informal survey was $44.22/bbl compared to Wall Street consensus estimates of $38.44 for 2005. "Given the disparity between what the Street thinks and what industry insiders think, current consensus estimates for E&P earnings and cash flows are likely too conservative," said Andrews.

He also said that Wall Street capital spending estimates for most E&P companies probably are too low. "In fact, many companies seem to be 'front end loading' their budgets with the expectation of increasing spending if energy prices hold up...

"While some companies may choose to emphasize stock buyback and/or debt reduction over exploration and development, that is not a commonly utilized strategy in the E&P space -- and very few observers think that it will become widely accepted," Andrews added.

Raymond James also said that many industry insiders expect merger and acquisition (M&A) activity to continue, although probably not at last year's pace. "Most companies still emphasize asset deals, though corporate M&A remains an option for many large-cap and mid-cap producers."

Andrews also noted that some of the more significant recent mergers and acquisitions, notably the $2.1 billion Magnum Hunter-Cimarex deal two week ago and the $3.4 billion acquisition of Patina Oil and Gas last year by Noble Energy, have emphasized one of two especially hot areas: the Rockies and the Permian Basin. "The three biggest transactions [in the last 12 months] were all in the Rockies, which suggests that E&P companies continue to seek out this region's long-term production and reserve growth opportunities."

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