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Energy Insiders Optimistic, Except on Gas Prices

Energy industry insiders appear to be more optimistic this year, but they expect 2010 natural gas prices to average about 10% below Wall Street expectations, according to the results of an informal survey by analysts with Raymond James & Associates Inc.

Raymond James analysts traditionally ask industry insiders gathering in Houston at the annual North American Prospect Expo (NAPE) for their opinions on a variety of topics. This year analysts J. Marshall Adkins, John Freeman and John Fitzgerald reported that the company executives they spoke with seemed "cautiously optimistic" regarding the 2010 oil and gas market.

"This year has brought a renewed sense of energy industry stability," said the trio in this week's Stat of the Week. "While this gas outlook may seem bearish relative to Wall Street expectations, we maintain that $5/Mcf gas is no disaster. This likely explains why many E&P [exploration and production] firms have laid out meaningful increases in capital spending for 2010."

The Raymond James survey asked executives to "guesstimate" oil and gas prices for 2010 and predict the upcoming five-year average. Those surveyed forecast 2010 gas prices to average $5.32/Mcf -- 9% below a Bloomberg consensus of $5.88 -- with a high of $7.20 and a low of $4.00. Average 2010 oil prices were predicted to be $76.95, 2% below consensus of $79, with a high of $119 and a low of $51.

E&P capital spending also is moving higher, which implies that "$5 gas is OK for producers," said the analysts.

"Executive commentary...suggested that E&P firms could make decent returns today with front-month natural gas prices in the $5/Mcf range (assuming slight contango going forward)," they wrote. However, if gas prices were to fall to $4/Mcf, "the answer was a resounding, 'That would be a problem.'"

Raymond James' updated 2010 E&P capital survey, now with more than 65% of its E&P coverage universe having announced 2010 budgets, "points to an aggregate increase in the range of plus/minus 20%," said the team. "For our coverage universe as a whole we are currently projecting a 15% rise in spending for 2010."

The executives' comments also gave the Raymond James team a "renewed confidence" in their 2010 U.S. rig count outlook, with the oil rig count steadily increasing through the year while the gas rig count keeps improving into the second quarter, with a "modest rollover through the rest of the year."

"Some of the most remarkable commentary we heard during the week was about how meaningful the application of oilfield technology has been to U.S. well economics," wrote Adkins and his colleagues. "While we have seen horizontal drilling increase from 10% of the total domestic rig count in 2005 to over half the current rig count, it was amazing to hear about the transformation some companies have undertaken. More than one CEO mentioned that they were drilling mainly vertical wells just a few years ago, but will only drill horizontal wells in the future."

Meanwhile, only one executive of 50 surveyed thought liquefied natural gas (LNG) imports would be "meaningfully higher" this year. "What this tells us is that the relatively low U.S. LNG imports over the past two years have lulled the market to sleep," wrote the trio. "While we have not been on the LNG import bandwagon before, we now believe that 2010 LNG imports could be up dramatically in the U.S. if natural gas prices are in the $5/Mcf range this year."

Energy analysts with Houston's Tudor, Pickering, Holt & Co. (TPH) also attended NAPE and agreed that the "general mood was upbeat but nervous about natural gas prices (both near-term and long-term). Shales are still the focus, as in previous years, but more Bakken and Niobrara (oil), and Marcellus than previously. And not as much Barnett, Fayetteville or Haynesville as in prior Expos."

Oil "is on everybody's radar," said the TPH team. "'How to play' is the question and explains the increased interest in Bakken and Niobrara."

Decline rates in the Haynesville were "on everyone's mind," said the TPH analysts. However, they said it was "hard to tell as Chesapeake Energy Corp. and others seem to be choking back wells initially and producing at a constant rate (10 MMcf/d). The general takeaway: producing less aggressively early on will increase overall recovery by placing less initial stress on the proppant (better retained conductivity)." The bottom line, they said, is still in a "wait and see mode on Haynesville decline," but for companies in the play, there's "still lots of enthusiasm."

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