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E&P Execs Found More Pessimistic than Wall Street

Exploration and production (E&P) company insiders have a "profound sense of near-term caution" for 2009 and now expect natural gas and oil prices to average roughly 20% lower than Wall Street expectations, according to an informal survey by Raymond James & Associates Inc.

The Raymond James energy team has conducted informal surveys at the annual North American Prospects Expo (NAPE) held earlier this month in Houston. This year was the first time E&P executives "have been more bearish" since the informal surveys began, wrote analysts J. Marshall Adkins, John Freeman and Cory Garcia.

"This relatively bleak outlook for the year, which is more in line with our current price forecast, explains why many have laid out dramatic cutbacks in capital spending," the trio wrote. The meltdown in both oil and gas prices since mid-2008 "has left a much more cautious taste in the mouths of this year's participants."

About 60 executives were asked to guesstimate energy prices for 2009.

"The group's 2009 forecast averaged $4.84/Mcf (or 25% below Bloomberg consensus of $6.45), with a high of $9.78 (who's drinking that Kool-Aid?) and a low of $2.88," wrote the trio. Average 2009 oil prices were forecast at $48.28/bbl, or around 17% below consensus estimates of $58.

Drilling costs were forecast to fall by 30-40% this year, with lower pipe and stimulation prices taking the biggest share of cost reductions, the survey found. However, even with the cutbacks and cost reductions, executives said the move to conserve capital "is being exacerbated by the nearly frozen capital markets."

With less access to financing for now, at least at a reasonable cost, some E&Ps instead are fixing their balance sheets or returning capital to shareholders through share repurchases and dividends, the survey found. This financial flexibility may allow some to "rake in assets at deep discounts," wrote Adkins and his colleagues.

"Several executives indicated that over the next 18 months, they hoped to find themselves in a position to act as the 'buyer of last resort' if, as we believe is likely, there will be increasingly more distressed assets for sale in 2009," wrote the Raymond James team.

Adkins and his colleagues also said it was "fairly apparent that gas prices would need to fall to $3/Mcf (or even $2) at some point this summer before the operators we spoke with would be willing to shut in production." Active hedging programs may allow some of the large gas producers to keep running "long after spot pricing would have made a play uneconomic."

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