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Analyst: Drop in Gas Prices Could Lead to Stock Price Correction

Profit for exploration and production companies, which has been soaring for the past two years, may fall well short of the 21% forecasted gain this year because of rising service costs and lower commodity prices, with shares of natural gas-focused exploration and production companies possibly showing a steep decline over the coming months, an energy analyst said in a new report.

Sanford C. Bernstein & Co.'s Ben Dell wrote in a note to clients the share price decline for gas producers will follow the news, which over the past few days has reported a drop in gas futures prices. Mild winter weather and and surprising storage news by the Energy Information Admnistration, which reported a 1 Bcf storage injection for the week of Christmas, could signal a correction in the market, said Dell.

"With the natural-gas forward contract on the verge of a breakdown, we believe the stocks could trade off in the near term and we would not be adding to the group at this time," Dell wrote. "A downward correction in equities of between 20-30% is possible." The value of energy company shares suggest an "unlikely" rise in prices to $12.50/MMBtu and a gain for oil of $75/bbl, the analyst noted. February futures deliveries were trading at about $9.65/MMBtu on the New York Mercantile Exchange, with oil trading at about $63.50/bbl late in the week.

Calgary-based EnCana Corp., Oklahoma City-based Devon Energy Corp., Houston-based Devon Energy Corp. and Fort Worth's XTO Energy Inc. were singled out as being particularly at risk because of their strong leaning toward gas production.

"The risk appears greatest for the gas names that have outperformed considerably over the last 12 months, even those with strong fundamentals." Less at risk are companies such as Los Angeles-based Occidental Petroleum Corp. and Houston-based Apache Corp. because of strong mix of oil and gas production.

Although gas prices began to fall over the week, E&P shares continued strong. EnCana, which started 2005 at around $26.45, was up on Friday in late day trading to stand at $45.95. Devon also rose on Friday to stand at $66.45; it started 2005 at around $36.48. EOG also continued its rise; its stock value has more than doubled in the past year to $77.78 from $32.10 at the beginning of last year. And XTO, just short of doubling its one-year price ($23.87 in January 2005) was up to end the week at about $45.98.

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