Fitch, the investment ratings and analysis firm, has joined the ranks of investment advisors with lowered expectations for the upstream natural gas and oil business, predicting stagnant prices through 2002 and into 2003.

The investment advisory service doesn’t see any rebound in the overall economy in the near future. “High inventory and the delayed recovery of industrial demand, which comprises over 25% of total U.S. gas demand, will help keep the lid on prices in 02 and probably well into 03,” Fitch analyst Sean Sexton said in a conference call Tuesday.

“Natural gas in the near to intermediate term will revert to its historical mean of a little over $2/Mcf,” the analyst said. Sexton predicted gas prices will average $2.15/Mcf in 2002 and $2.25 in 2003. At the same time the price of the benchmark WTI crude will stay at $19.50 in 2002 and $20 in 2003. Fitch sees a pullback in drilling of about 25-40% next year, as a result of the lower prices.

The lower oil price prediction is based on an abundance of crude and the expectation of less cohesion among the OPEC countries in setting production. While Sexton said the events of Sept. 11 did not change the fundamental picture for upstream oil and gas, it is possible that there could be price spikes if there is disruption of supplies from the Middle East.

The one bright spot for natural gas is the returning industrial load, which Sexton said, will increasingly be deserting oil in dual-fired facilities to return to gas, now that prices have dropped out of the stratosphere.

Fitch expects industry consolidation to continue, but not at the same pace as the last six to eight months. While acquisitions will continue, Fitch expects they will be more conservatively financed.

The ratings firm said many upstream companies used the period of high prices “to repair their balance sheets.” Consequently, it sees the industry as “stable, at or near target credit ratings.”

In the pipeline sector, Fitch analyst Ralph Pellecchia sees more companies converting operations to the master limited partnership form, similar to Kinder Morgan. He said the companies are finding MLPs “a more efficient, profitable way to expand.”

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