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Energy Sector Seen Holding Its Own Even as Stock Market Falls

Pressured by the uncertainty of whether Congress would pass the $700 billion loan package for Wall Street, the U.S. energy sector took a dive on Friday as commodity prices spiraled lower. Some energy companies may have trouble securing loans in the short term, but overall, the sector should survive, energy analysts said.

The Dow Jones Industrial Average managed to eke out a 1.1% gain late in the day, rising 121.07 points in an extremely volatile day. However, nearly all of the energy sector was in the red, with independent oil and gas producers losing almost 4% of their value overall on the day. The majors showed gains toward the end of the day, but still were off almost 1%, while oil and gas pipelines declined slightly to around 1.15%, and gas utilities lost around 0.6%.

Some of the biggest losers Friday are some of the largest gas producers in North America: EnCana Corp., down 4.04%; Devon Energy Corp., off 3.78%; and Chesapeake Energy Corp., off 6.16%. Hess also was down 6.79%, and Nexen Inc. lost 4.97%. One of the biggest losers was Petrohawk Energy Corp., which slumped 8.56% to $23.19, down $2.17/share.

A sign of worse to come? Not necessarily, said energy analysts Friday.

"I think people are just selling to raise money regardless," said one energy analyst who did not want to be named. "We are just the unlucky victims today."

Purvin & Gertz's John Vautrain noted that "the general direction of the market is heading downwards because the economic sentiment and economic outlook are weak...It is a very volatile time and the market will get more and more jittery each day the U.S. rescue plan gets delayed."

Houston Energy Partners co-manager John Olson, who has long watched -- and correctly predicted -- trends within the industry, told NGI that the federal government's plan to loan money to Wall Street "may have some ripple effects, but I don't think it will be large or measurable" on the energy sector.

"There may be some side effects that may inhibit banks' ability to create incremental financing" for the oil and gas industry, said Olson. Some loans could be more difficult to obtain for certain companies.

However, with oil prices hovering around $100/bbl and gas prices above $7/Mcf, "the industry remains in remarkably good state of health and is liquid," meaning that it has a "good cash flow position," Olson said.

The energy markets in the past few weeks have held to a certain level of normalcy despite the roller coaster ride in the equities markets, said Rafferty Technical Research's Steve Blair in New York City.

"I think the financial bailout won't have a whole lot of an impact on the energy markets," Blair told NGI. "However, we will feel the plan's effects through the U.S. dollar. When the dollar is strong, commodities weaken and when the dollar is weak, commodities strengthen.

"If we were going to see much of a change with this whole situation, we would have already have seen it," he said. "The equity markets have clearly shown confidence when the market thought the $700 billion deal was done. When the news came out that Congress was actually far from a deal, the equity markets moved lower. I don't think we have seen too much of that in the energy markets."

One outcome likely will be lower spending, however. Chesapeake, the largest U.S. gas driller, last Monday cut its capital spending by around 17% through 2010. Privately held producer Antero Resources apparently was unable to finance all of a Marcellus Shale package it had agreed to buy from Dominion in July, and accepted less drilling acreage but had to pay more money per acre. And Occidental Petroleum Corp. (Oxy) agreed to acquire the interest it didn't already own in some Permian and Piceance basin fields from Plains Exploration and Production Co. (PXP) for $1.29 billion -- considered a great deal (see related stories).

And, of course, there's that tentative $4.7 billion deal that MidAmerican Energy Holdings managed to put together to rescue Constellation Energy Group (see related story).

"There are a lot of property packages on the market right now," said Tudor Pickering Holt & Co.'s David Heikkinen. That may mean sellers can find some better deals now than they could have even a few months ago.

Occidental CFO Steve Chazen told the Wall Street Journal his company's deal with PXP began with a phone call from PXP CEO James Flores. "We told them what the price we were willing to pay was, and [Mr. Flores] says, 'Well how about more?' and we say, 'No,'" Chazen said.

T. Boone Pickens, the energy maverick who runs Dallas-based energy hedge fund BP Capital, has seen his fund lose an estimated $1 billion this year -- including around $270 million of his own money. The fund includes many gas producers, including Chesapeake.

"It's my toughest run in 10 years," Pickens said of the losses. "We missed the turn in the market; there's nothing fun about it. I'm not willing to accept that [the downturn] was due to a global slowdown. When there's deleveraging in markets it will affect everything."

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