SSB Says E&P Shares are on Decline, Buy Now

Even with natural gas and crude oil prices posting slight gains earlier this month, exploration and production (E&P) shares continued their decline as they got caught in the overall down-draft of the market, according to Robert Morris of Salomon Smith Barney (SSB). E&P shares ended the first week of April down 3.5%, on average, while WTI spot crude oil prices gained nearly 3%, and composite spot natural gas prices rose more than 1%.

Entering the traditional natural gas storage injection season with 620 Bcf, 40% below last year's level, SSB said it predicts gas prices will remain in the range of at least $4.00-$5.00/MMBtu (see NGI, April 9). The firm also expects gas storage to increase over last year.

Due to its assertion that natural gas storage injections will be 2-3 Bcf/d higher than last year, SSB expects E&P shares to post "lackluster performance" over the next couple of months. However, SSB acknowledges the longer-term fundamentals still bode well with valuations, on average, still reflecting no more than $20/bbl WTI spot crude oil and $3.50/MMBtu composite spot gas price.

The "real test," as SSB calls it, and perhaps the "critical catalyst" for E&P shares, could be the response in gas prices this summer to the stress that will be placed on the electric power grid across the country during heat waves.

SSB said it sees any strong weakness in E&P shares in the near term as an opportunity for investors. Consequently, the firm said companies it would continue to look to hold and accumulate on weakness include Anadarko Petroleum Corp., Apache Corp., Devon Energy and EOG Resources, among the larger market-cap names, and Cross Timbers Oil, Chesapeake Energy, Stone Energy and Vintage Petroleum among the smaller-to-mid-cap companies.

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