After suffering through a long period of low prices and thinmargins, exploration and production (E&P) companies appear tobe headed toward a period of success, a report published recentlyby Deutsche Banc Alex. Brown (Deutsche Banc) said. Strong gasprices, industry consolidation and probable low storage levels arethe main factors contributing the report’s bullish conclusions.

“We see significant upside over the next six to 12 months,”Deutsche Banc said in the report. “…The operating environment forE&P companies for 2000-01 looks quite robust, certainly morefavorable than what is being reflected in stock prices of thegroup, in our opinion.”

Prices at the Northeast citygates have led an overall reboundfor gas prices, the firm said. Demand is pushing prices up, andmuch of the needed supply is in “remote or high-cost areas” such asthe Northwest Territories and deepwater Gulf of Mexico. For therest of 2000, $2.50 to $3/Mcf is expected to be the norm for thefutures screen. The report also indicated that the screen couldspend a “considerable amount of time” in the $2.75 to $3/Mcf range.An average of $2.50/Mcf would be an increase of 8% over 1999levels.

“In our view, a new equilibrium gas price of $2.50-$3 will benecessary to provide sufficient incentive for producers to developthe gas resources needed to meet expected demand growth.”

The storage situation is also bullish for producers. DeutscheBanc said it anticipates gas in storage to fall below 1 Tcf byMarch 31, even with a 5% to 10% warmer-than-normal rest of thewinter. In the second and third quarters of this year, DeutscheBanc is anticipating a demand push thanks to the start-up ofseveral gas-fired power plants, further exacerbating the storageoutlook. By October, the report projects inventories to be roughly400 Bcf below normal, setting the industry up “for an extremelytight market during the winter of 2000-01.”

Even with the additions of the Northern Border Pipeline and theSable Island Pipelines, gas demand has remained largelyunsatisfied, Deutsche Banc said. These projects, along with theplanned Alliance Pipeline, were originally expected to boostimports by 1 Bcf/d in 2000. Now, however, the report indicated thatthe import increase is only expected to be half that level.

“At one point, there was a concern that the addition of newpipeline capacity would result in a surge in gas imports fromCanada that would cap the upside for gas prices in the U.S. Now, webelieve that the Canadian gas is desperately needed just to keep upwith the growth in demand here in the States.”

The industry’s merger and acquisition (M&A) trend isexpected to continue. It strengthens bottom line results, bettermatches management skills and increases cash flow. Deutsche Bancsaid the majors “are going through a new round of portfoliorationalization of a kind not seen since the early 1990s.” Anestimated $10 billion of properties in the onshore U.S. and Canada,as well as shallow offshore Gulf of Mexico will be sold in 2000-01,the report indicated.

Companies looking to buy properties include Apache Corp.,Burlington Resources and Unocal. Companies looking to buy othercompanies include Phillips, Texaco, Kerr McGee and Conoco.Attractive purchases would be Unocal and Anadarko according to thereport.

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