Despite Equitable Resources’ lower fourth quarter earnings for 2001 when compared to the similar quarter of 2000, UBS Warburg’s Ronald Barone rated the Pittsburgh-based company a ‘strong buy’ due in part to its “significant collar/hedge position,” which will likely mitigate a substantial part of its exposure to the “ongoing weakness in natural gas prices.”

“We have largely mitigated the impact of lower commodity prices for 2002 and beyond through significant hedging of natural gas sales,” said Murry S. Gerber, CEO of Equitable. “We believe the proactive approach we have taken to managing the natural cycles in our business will lead to competitively superior growth and high return on capital.”

For 2002, the company said it has hedged 33 Bcf at an average of $4.15/Mcf. This is in addition to 14 Bcf in prepaid forward sales at approximately $4.00/Mcf. Looking further into the future, Equitable also has hedges in place between 2003-2008. For 2003, The company has hedged 24 Bcf of its natural gas production through swaps at an average price of $4.45/Mcf and 14 Bcf from two prepaid contracts were sold at $4.00/Mcf. For 2004 and 2005, Equitable said 26 Bcf of production is hedged through swaps at an average price of $4.50/Mcf and 5 Bcf from two prepaid contracts were sold at $4.00/Mcf. As for 2006-2008, the forward sales drop to zero while the swap volumes rises to about 30 Bcf per year at an average of just over $4.00/Mcf.

During Equitable’s conference call, the company explained its strategy of reducing exposure through commodity hedges. It also reduced its exposure to oil commodity prices by divesting 68 Bcfe of its Appalachian proved oil reserves during the fourth quarter for $60 million. Equitable said that due to low natural gas prices, it does not expect further reserve selling at this time.

Speaking on the company’s reserve selling strategy, Gerber said, “Market conditions are just not appropriate at this time to execute such transactions. If the market conditions change we will reconsider that decision. We will continue to act as if relatively little is stable about the environment for our business. This background paranoia we hope will keep us on our toes.”

In a UBS Warburg’s Global Equity Research brief, Barone said all of Equitable’s current hedges were transacted with a diversified group of AA rated banks and financial intermediaries. The analyst added that the company’s current hedges are roughly $102 million “in the money” to Equitable today.

“Despite management’s best efforts to limit commodity risk by using hedges, this strategy now exposes Equitable to some level of counterparty risk,” Barone said in the brief. “[Equitable’s] management prefers monetizations and outright property sales because Equitable effectively sheds the commodity price risk. At the same time, Equitable retains the right to collect operating and gathering fees for producing and transporting the commodity. More importantly, there is no counterparty risk associated with monetizations and property sales because equitable receives the cash up front.”

On Thursday, Equitable announced record core earnings per diluted share (EPS), excluding earnings from Westport Resources, of $2.12 for 2001 compared to a core EPS of $1.46 in 2000, an improvement of 45% (see Daily GPI, Feb. 8).

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