Although it remains "bullish on 2007 in aggregate," Friedman, Billings, Ramsey & Co. Inc. (FBR) on Monday cut its 2007 natural gas price forecast to $7.60/Mcf from $8 and reduced its 2Q2007 gas benchmark assumption to $7.20/Mcf from $8.
FBR cut its annual price forecast based on Henry Hub natural gas spot prices averaging $7.19/Mcf in the first three months of the year. FBR also adjusted its earnings per share and cash flow earnings per share estimates on the exploration and production (E&P) companies it covers.
"With weather turning colder in the past few days, we believe we are getting a small respite from natural gas injections, which began two weeks ago," said a team of analysts led by Rehan Rashid. "With visibility; on summer weather, the hurricane season, and production growth only beginning to materialize, we continue to see a tight balancing act, adding upside to natural gas prices."
FBR said it remains bullish on gas for several reasons.
"The latest predictions are calling for five Category 3-plus hurricane sin the Gulf of Mexico and another hot summer," Rashid wrote. ""In this context, the switch to storage builds over the past two weeks looks like a needed start to summer rather than a whimpering end to winter."
Regional gas storage levels at the end of the heating season are lower in the East than in 2006, while levels in the West and Producing regions are about flat versus a year ago, FBR noted. "In aggregate, the East and West are still 22% above the five-year average, while the Producing region (where storage is more flexible) is 36% the five-year average. Cold weather in the current week will help at the margin too."
The analyst team wrote that current nuclear generation levels remain robust, in line with a year ago when temperatures were colder, "though we note some of this is undoubtedly an early move to air conditioning." Overall electricity generation also is lower, the team noted, "suggesting that the mix of gas-fired power is down, although we are heading into coal maintenance season and a potential UMWA [United Mine Workers of America] strike can be viewed as bullish."
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