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2009 Called 'Terrific Year' for Energy Investors

"Terrific" may not be the first word that comes to mind when describing the economy in 2009, but for investors in natural gas and oil stocks, last year was absolutely divine, with nearly 85% of the stocks in the global market delivering positive returns, according to a report issued last week by energy research firm IHS Herold.

Because of the huge drop in stock values by the end of 2008, investors last year recouped just one-third of their total losses from the previous 12 months, but the median gain for 491 energy stocks reviewed was 59% -- the best gain posted in the 14 years IHS Herold has compiled the Energy Peer Group Stock Market Performance Report. Oil stocks outperformed the market indices of nearly all Organization for Economic Cooperation and Development (OECD) countries, with total capitalization jumping by almost $900 billion.

"There were some amazing gains made last year by energy company stocks, but those gains have to be put into perspective with the fact that most of those stocks, along with the market as a whole, took an incredible beating in 2008," said Robert Gillon, co-director of equity research at IHS Herold. "One year ago there was no solid evidence that the U.S. and UK financial systems were going to recover from the shocks they had suffered -- the declines in commodity and equity markets during 2008 were nearly unprecedented in depth and velocity. Having energy stocks recover nearly one-third of those losses in such a short period should be taken as a very encouraging omen."

Some observers focus on lagging indicators such as unemployment statistics, which can be unsettling, Gillon said.

"The truth is that much of the world is moving forward and its energy needs are growing," he noted. A case in point, he said, is Asian markets, which were among the strongest in the world last year, in part because a spreading economic recovery originated in that region -- and their markets sold off even more sharply in 2008 than did OECD exchanges.

Above-average economic growth in Asia stimulated demand for petroleum products, which boosted earnings of downstream companies operating there. In addition, regional natural gas producers benefited from rising consumption and higher prices, especially in situations where their realizations are tied to global oil prices.

Results in 2008 were so "catastrophically bad" that even solid energy companies were sold down to fractions of their intrinsic value, the report noted.

"The market gave no credit for their undeveloped assets on the assumption that funding to finance growth plans would be unavailable for an extended period," Gillon said. "As a result, when some semblance of normalcy returned, many of the unduly depressed companies with quality assets soared. For investors who held on during that nail-biter of a roller coaster ride, there was a nice payoff."

Of the 491 stocks in the survey, only 72 stocks declined "and nearly that many had gains in excess of 150%," the report noted. "However, the largest advances were generally confined to smaller companies, and the total capital appreciation fell short of 2007's level. It is important to note that in 2004 the total capitalization of the majors was 5.6 times that of the [smaller] producers. Today that ratio is down to 4.3 times."

Value diversification was underscored by the latest results. "Of the top 25 performers in the survey, 21 had their assets almost exclusively outside of North America," said the report. "Conversely, among the bottom 25 performers, 18 had their assets within North America. A similar effect was evident in group returns, with the integrated oil companies that possess U.S. downstream operations rising only 16%, whereas those with refineries elsewhere gained 55%, almost matching the survey median."

Despite reaching the lowest prices in years, natural gas prices are bullish for 2010 and investors are more bullish as well, said the report.

"Natural gas prices finished last year at an average of $3.94/MMBtu, which was the lowest price since 2002, and less than half the price of the prior year," the report said. "However, natural gas traders are bullish for the fifth consecutive year, and the forward curve says that gas for delivery next January will be $6.97/MMBtu, nearly a dollar over the current price."

According to the report, global capacity to produce natural gas, either as liquefied natural gas (LNG) or for domestic markets through conventional distribution, is rising more rapidly than the historic growth rate of demand.

Supplies from the Haynesville Shale "will increasingly compete for a market with LNG from Yemen, and at a price linked to Henry Hub, not global crude markets," said Gillon. "It may be many years before North American consumers contend with the impacts of $12/MMBtu gas again."

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