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With the Summer in Mind, Analysts Turn Bullish

With the Summer in Mind, Analysts Turn Bullish

Gas price bulls can sit pretty this summer as industry analysts agree that the stage is set for strong demand, stressed supply and higher prices in both the futures and cash markets.

PaineWebber reported an increase last week in its year 2000 projection of composite spot delivered-to-pipeline gas prices from $2.40/MMBtu to $2.50/MMBtu. Ron Barone, a PaineWebber analyst and author of the report, also went a step further and raised his 2001 projection from $2.40/MMBtu to $2.50/MMBtu. The new 2001 estimate is higher than the Wall Street consensus estimate of $2.46/MMBtu for the same period.

"These changes reflect ongoing increases in weather-normalized demand, depressed deliverability, as well as the reality that the drilling response, while increasing, remains limited."

The "lackluster" rig count, as Barone called it, was a major factor in the price increase. According to the report, the total U.S. rig count was 768 for the week ended March 24. While up from 526 for the month of March 1999, the report noted the total is down from 815 in mid-December. "We believe a total U.S. rig count in excess of 1,000 is necessary to replace production. The reality is that the 2000 rig count will remain well below 1,000 because of financial and operational constraints."

Supplies from Canada won't help much this year, Barone said in the report. The 1998-99 production cutback also limited supply from the North and Canadian imports are only expected to amount to 3.56 Tcf this year, marking "only" a 6.6% increase from 1999. As a comparison, Barone said 1999 Canadian imports grew 9.4% in 1999. The Alliance system, which is being hailed as one of the major importers of Canadian supply when it becomes operational later this year, will only transport 65% of its available capacity, Barone said. He does not expect the pipe to reach its full potential until 2002-2003.

Another key indicator, according to Bob Morris, an analyst with Salomon Smith Barney, is the gas storage level heading into the injection season. With only one more American Gas Association storage report left in withdrawal season, supplies are hovering around the 1 Tcf mark. Morris said that it is highly likely injection season will start with storage levels close to 25% less than they were last year. Couple that with his estimate that deliverability is down 5% from last year and Nymex prices above $3.00 will not be uncommon this summer, Morris said.

"In late August we could see a push above $3.00 if the potential for a vast amount of unused storage space is realized and people start buying gas for the winter. If we even have remotely normal winter temperatures in the early months of the season, fourth quarter Nymex gas is very likely to average more than $3.00."

His composite spot price average for 2000 is $2.52/MMBtu, and that is a conservative number, he said.

While the supplies will be stressed, Barone sees clear sailing for increased demand. Overall, gas-fired generation demand plus storage refill injections could exceed available supplies by 2 Bcf/d this summer. Several gas-fired power plants are expected to be connected to the electric grid in the near future. Tighter nitrous oxide and sulfur dioxide restrictions will be implemented this ozone season, limiting output from oil and coal-fired power plants. Oil prices remain relatively high, which should cause fuel-switching utilities to use gas more.

These factors combine with a summer outlook issued by the National Oceanic and Atmospheric Administration calling for above-normal temperature averages throughout most of the U.S. to create a very rosy demand picture, Barone said.

The expected hot weather will have an impact in the next two or three months, John Olson, a consultant at Sanders, Morris & Mundy said. "I expect a pretty stable price environment for the next couple months, but any hot weather will cause price spikes early on." Olson predicted Nymex prices to stay between $2.50/MMBtu and $3.00/MMBtu, with the potential to top the $3.00 mark when the prices spike.

With gas prices expected to continue rebounding through the summer, PaineWebber also expects higher profits for companies in the industry as well. The report outlined activities of some major gas players and gave a positive outlook on the industry. In fact, the firm raised its estimates and price targets for Coastal, Enron and Equitable Resources. It also upgraded Williams from neutral to attractive.

"In short," Barone said in the report, "it has been a while since the fundamentals of this industry --- or the average company within [the industry] --- have been as strong as they stand today."

John Norris

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