Analysts at Raymond James & Associates Inc. admit to being "much more bullish than the Street on 2008 domestic natural gas prices." And judging by what they said they heard at their recent institutional investors conference, producers are pretty bullish, too.

"Throughout their presentations, E&P companies made no mention of slowing activity," Raymond James analysts wrote in their Stat of the Week. "As we have frequently pointed out, the threshold for economics is much lower than many would think; on average, F&D [finding and development] costs have stayed in the $2-2.50/Mcfe range, and most producers would not consider cutting back activity unless the natural gas strip dips meaningfully below $6/Mcf."

E&P companies are still aiming for growth at strip prices of $7.50-8.00/Mcf. And compared to recent months, it's a good time to spend for growth as costs have moderated a bit and there are fewer supply chain bottlenecks, the analysts said. "[M]ost producers were confident [enough] to say that the tightness in the rig market, at least in the near term, is not as prevalent relative to last year. The bottlenecks, especially with takeaway capacity, compression and fracing equipment, have eased considerably, and producers now point to labor as the key constraint."

The analysts said most of the producers they heard from are optimistic there will be an upturn in commodity prices in the next 12 months. "As a group, E&P companies believe gas has hit a floor at roughly $7/Mcf, which makes for very favorable economics, especially since prices were as low as $1-2/Mcf just four years ago."

A retrenchment was noted among private drillers over the last few months with many onshore drilling contractors taking rigs off the market. "Generally speaking, private operators are quicker to pull the plug given their lower access to capital, lower quality prospects, inability to hedge, and differing strategic metrics." However, the analysts noted that with the recent firming in the 12-month strip (above $8/Mcf), interest among smaller operators is starting to rebound.

Also contributing to the bullish picture is the fact that storage is not expected to be full as once thought when withdrawal season ends. Consensus expectations at the start of winter were for a bearish ending storage number of 1.8-1.9 Tcf, the analysts said. "While our current forecast for storage to end around 1.4 Tcf is not bullish by historical standards, it is much more constructive than the previous perception (which may have played a role in cap ex [capital expenditures] sitting on the sidelines over the past several months)," the analysts said, noting that they expect the market to be rebalanced by the end of the summer injection season.

Additionally, the analysts said they expect the spin-off trend to master limited partnerships (MLP) to continue (see Daily GPI, March 9). They said MLPs are trading at eight to 12 times 2007 earnings before interest, taxes, depreciation and amortization (EBITDA) while the multiple for E&P companies is more like four to six times.

"[W]e believe that 2008 is setting up to be a very bullish year for both E&P and oilservice companies," the analysts said. "Based on our 2008 commodity price deck of $10/Mcf natural gas and $70/bbl oil, we believe that every rig that can work will work in 2008, and that investors stand to reap the benefits by jumping into the pool sooner rather than later."

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