Natural gas prices may be “rangebound” into 2011 and could, in fact, be lower than average prices this year, two separate energy analysts said last week.

Goldman Sachs is forecasting gas prices through 2011 to range between $4.50/MMBtu and $7.00/MMBtu “due to the material potential supply response” — both from production and near-term liquefied natural gas imports — “to higher prices and demand response (coal-to-gas substitution) to lower prices.”

The Goldman Sachs energy team continues to see 2010 Henry Hub gas prices averaging $5.50/MMBtu “and see a rebound to $6.50/MMBtu on average in 2011 (reduced from $7.00/MMBtu). Longer-term demand trends are improving due to coal plant retirements and pending carbon policy.”

Even at lower prices, exploration and production (E&P) companies that dominate the lower-cost North American resource plays to become “regional beneficiaries” versus integrated oils and private producers, said the Goldman Sachs analysts. The benefits derived from drilling specific plays warrant “premium multiples versus historical averages,” said the team.

The December rally in gas prices and recent mergers and acquisitions recognized the value of some onshore E&Ps, Goldman Sachs’ Brian Singer and his fellow analysts said in a note last week. The E&P group now trades at 6.5 times 2010 enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) on $5.50/MMBtu Henry Hub gas and $90/bbl West Texas Intermediate oil. This compares with the five-year average of 6.2 times EV/EBITDA, Singer noted.

“We have greater confidence that in aggregate our covered E&Ps can grow production while other listed and private producers should see declines,” the analysts wrote. “We expect a return to more normal demand growth in 2011 with potential acceleration in years beyond largely driven by increased gas-fired power demand.”

E&P stocks “deserve premium multiples to historical averages to reflect lower cost, lower risk and more visible growth potential. While new gas resource may otherwise lower natural gas prices, we estimate that E&P stocks would have similar overall upside in a scenario with a $1.50/MMBtu higher gas price without resource plays.”

As Goldman Sachs analysts see it, the keys to strong E&P performance this year will ride on three factors:

“While we see multiple emerging resource plays continuing to see efficiency gains, we view the Marcellus as among the lowest cost with less potential volatility in its position on the cost curve, barring stringent local regulations that limit drilling opportunities that we do not expect in Pennsylvania,” Singer wrote.

“We increasingly believe prospectivity in the play is rising, while proximity to eastern consumption markets provides a strategic advantage for relative rates of return.”

Analysts like the Granite Wash play that spreads across the Texas Panhandle into Oklahoma because “unlike most resource plays where companies need wide acreage positions to generate critical mass, the stacked pay nature of the Granite Wash play could lead to substantial resource upside from relatively small acreage positions.”

More asset sales, joint ventures and restructurings were predicted “as companies gain confidence in lower-cost shale growth. Over the last year we have seen EnCana announce a split-up of its growing gas assets from its oilsands and low-growth gas assets, Quicksilver Resources and EXCO Resources announce joint ventures for shale areas and Devon Energy announce offshore and international asset sales.

“We expect additional announcements similar to these from other E&Ps and view this as a positive catalyst for stocks.”

Barclays Capital analysts see another bearish year in 2011. After dropping their gas price outlook for 2010 in late March (see NGI, March 29), analyst Jim Crandell and colleagues Biliana Pehlivanova and Michael Zenker looked ahead to 2011 to determine what the markets may look like. What they see ahead is lower prices.

“After growth in U.S. supply of 2.4 Bcf/d in 2009, despite the rig count cut of last year, U.S. supply is expected to grow an additional 2.7 Bcf/d in 2010,” they wrote. “This momentum carries into 2011, which features growth of 1.2 Bcf/d. Note that supply growth in each of these years is above trend-level demand growth in the U.S.”

Because this year’s supply growth will spill into the 2011 balance, it “points to another disappointing year for producers and another year of inflation-fighting natural gas prices for consumers. Balances are even looser in 2011 than in 2010, and the only way we get to a reasonable storage finish in 2011 is by driving coal displacement even higher in 2011.”

Forecasting the gas-directed rig count through 2011 “is clearly a fool’s errand,” said the analysts, but they wanted to highlight the role in gas balances. “Even assuming that the rig count falls to 700 and stays there, 2011 remains well supplied. This means that if the rig count does not fall that far, or if it recovers later in 2011, the market is even more awash in gas.”

Coal displacement needs to be about 30% higher in 2011 than in 2009, the trio estimated. “The combination of the implied competition with coal and high estimated levels of storage yields a bearish outlook for prices, leading to our forecast for 2011 of $4.10/MMBtu. 2011, therefore, is not a year of price recovery.”

The ability of producers to oversupply the market “could remain a market feature beyond 2011,” they wrote. “We have not prepared balances for 2012 and beyond, as there are too many moving parts, but remain convinced that producer discipline will be key to price outcomes, as the potential for production growth appears to significantly outpace the potential for demand increases.”

Rising service costs and the need for the market ultimately to price at levels that approach the cost of marginal wells means that prices will have to rise to $6-7/MMBtu by 2015, the Barclays team has concluded.

“While we do not dismiss the possibility that they could correct to that level, the evidence that producers can rapidly ramp supply higher in response to prices well below $7 suggests that such prices are unlikely to be sustained.”

Considering the drilling efficiencies in the past two years and the production-growth producer business model, the market is faced with “two daunting obstacles for a sustained pullback in U.S. supply. While producers may require $6 or higher prices for supply to remain near current levels, a willingness to drill in a lower price environment suggests that prices can remain detached from costs for an extended period.”

With several unknowns still to be determined, the Barclays team set its 2012 price outlook to $5.25/MMBtu and the long-term (2015) gas price to $5.75.

Last Thursday Moody’s Investors Service said the U.S. oilfield services sector may be moving toward a positive environment, but the sustainability of E&P spending “remains uncertain” because of weak natural gas prices and a continued oversupply.

“Oilfield services companies supporting oil or natural gas plays with high liquids content should see enduring demand in 2010,” said Moody’s Senior Credit Officer Pete Speer. “However, companies focused on North American natural gas plays could see a weaker second half of 2010 because of tepid natural gas supply-and-demand fundamentals.”

For the E&P sector, the outlook remains “negative,” because many E&Ps have to keep output and drilling “at high levels to satisfy equity holders and maintain their acreage positions” even with weak gas prices. The rising pace of drilling likely will increase oilfield services costs for the E&Ps.

Moody’s is maintaining a commodity price outlook this year of $4.50/MMBtu for gas and $75/bbl for oil. Analysts assume gas prices will rise to around $5/MMBtu in 2011, “then $5.50 thereafter.” Oil prices are forecast to be higher at $80/bbl in 2011.

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