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S&P Cuts Gas, Oil Price Assumptions

October 20, 2008
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Citing the risk of a "prolonged" global economic downturn and the drop in Henry Hub natural gas prices from their summer highs, Standard & Poor's (S&P) Friday slashed its natural gas prices by $2 to $7/MMBtu for 2009 and 2010, and said that in 2011 and beyond, gas prices would average $6.

In May S&P predicted 2009 gas prices would average around $9/MMBtu. Analysts also cut 2009-2010 oil prices by $20, and now expect them to average $70/bbl for West Texas Intermediate (WTI). Longer term, S&P expects WTI oil to average $60/bbl.

"It is unlikely that the changes in our price deck will result in wholesale downgrades," said S&P analysts Karl Nietvelt, Thomas Watters and David Lundberg. "However, some issuers, depending on their hedge positions and willingness to scale back capital spending plans, might be affected."

The trio of analysts noted that gas prices "have again proven highly volatile over the past year. In the first half of 2008 prices nearly doubled, from slightly more than $7/MMBtu to over $13/MMBtu. They have since fallen precipitously, to less than $7/MMBtu."

Several "issues" are expected to keep gas prices flat at their current levels in the coming year:

Weather is expected to continue to be a wildcard for gas prices, said the S&P analysts. "Considering natural gas inventories are at levels that are bearish for prices, and increased production from shale plays, particularly warm weather could result in a further decline in natural gas prices."

The S&P team said its assumptions are conservative and are "key to our fundamental assessment of a company's ability to meet future obligations. According to S&P, the price assumptions also reflect:

"Finally, it is important to remember that our price deck is a New York Mercantile Exchange (Nymex) price," said the analysts. "However, many natural gas producers sell at a discount to Nymex primarily due to location takeaway capacity. This discount can be substantial as evidenced by the fact that at the moment, Rockies gas prices for November 2008 are approximately 40% less than the Nymex price."

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