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RBC Sees Gas Prices Higher, E&P Stock Prices Down

RBC Sees Gas Prices Higher, E&P Stock Prices Down

Expectations for adequate natural gas storage supplies and the approaching seasonal drop in crude demand will likely lead to a decline in both commodities and the exploration and production (E&P) stocks in the near term, but the outlook long term remains positive, according to analysts with RBC Capital Markets.

In a report, RBC revised its long-term gas forecast, increasing it to $4/Mcf from $3.75 "to reflect the tight supply and demand environment we forecast," said analyst Andrew T. Lee. "Additionally, based on our assessment of costs, we think that $4/Mcf is needed to provide E&P companies the economic incentive to continue drilling." Analysts also raised crude forecasts across the board to $28.50/bbl from $26.

Although analysts see longer-term higher prices, both oil and gas prices and E&P stocks are expected "to exhibit near-term weakness." Even with the increased price forecast, "at current stock prices, we see no upside potential in the group over the next 12 months," said analyst Joseph D. Allman.

"We think the stocks are already discounting a higher long-term price deck of $4.25-$4.50/Mcf gas and $27/bbl and even higher prices near term (close to our price deck for 2004/05)." Over the next few months, RBC analysts believe "there will be a better buying opportunity for the E&P stocks."

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