Lehman Brothers Raises Performance Estimates on Mid-Cap Producers

Lehman Brothers raised its earnings per share and cash flow estimates on a group of 16 mid-cap oil and gas production companies by 17% and 7%, respectively, because of higher Nymex gas and oil futures prices and higher Lehman Brothers spot price forecasts for the second quarter and the full year.

"We are increasing our [forecasted] 2Q03 natural gas and oil price[s] to $5.40/MMBtu [Henry Hub] and $28.40/bbl [West Texas Intermediate] from $5.00/MMBtu and $27.00/bbl," Lehman Brothers analysts said in an equity research report. They also increased their forecasts for the second half of 2003 to Nymex strips of $5.50/MMBtu and $24.25/bbl from $4.75 and $24, respectively.

"Our revised full year '03 benchmark price prices for WTI and Henry Hub become $27.75 and $5.75 from $27.25 and $5.25." The analysts forecast $4.50 at the Henry Hub and $23/bbl for WTI for 2004.

"Natural gas oriented producers that have not hedged their '03 production, such as Comstock Resources, Chesapeake Energy and Stone Energy stand to benefit the most from our revised commodity price outlook," the analysts said.

"Based on our new '03 benchmark prices, we estimate that aggregate discretionary cash flow will exceed capital expenditures by 41%. We continue to expect producers to use the excess cash flow on property acquisitions and incremental drilling."

The Lehman Brothers analysts said first quarter spending habits indicate an upward bias toward increasing exploration and development expenditures. "[About] 20% of our universe has increased their drilling budgets since the beginning of the year. However, we continue to believe that the first preference among many companies will be to use the capital to acquire assets that might provide some future growth opportunities. On that note, we would highlight Houston Exploration, Newfield Exploration, Chesapeake Energy, Pogo Producing and XTO Energy as the most likely buyers of properties."

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