Due to market fundamentals that are currently stronger than they were at the beginning of the heating season, Lehman Brothers’ Jeffrey W. Robertson said he has raised his Nymex gas price estimates to $5.00 and $4.50/MMBtu for 2003 and 2004 from $4.50 and 3.75 to reflect the tight supply/demand balance in the natural gas markets.
Robertson noted that storage withdrawals this season have averaged 40% higher than 5-year averages, while the weather has only been 4% colder. “Storage inventories could be 600-650 Bcf at season end, setting the stage for continuation of strong gas prices this summer, as gas is likely to be bid away from other consumers for refill,” he said. If the trend holds true, strong gas prices could continue through 2004.
The analyst added that the lack of lasting production impact from the 2000/2001 drilling boom suggests that prices will continue to ration supply. In addition, with free cash flow available to reduce debt/fund acquisitions, the asset market should be “very competitive,” Robertson said.
“We believe the relatively stagnant rig count reflects caution among the E&P companies as to the sustainability of the price run-up and the reminder that the drilling boom in 2000-2001 did not seem to add much lasting value,” he said. “As a result, we believe that the sustainable gas price has moved into the $4.00-4.50 range from [plus or minus] $3.50.”
Lehman Brothers’ 2003 quarter by quarter gas price breakdown calls for an average of $5.50/MMBtu during the first quarter, $5 in quarter two, $4.50 in the third quarter and $5 again in the fourth
In addition to bumping gas prices, Lehman Brothers also revised its oil price estimates to $27.50/bbl for 2003 and $22.50/bbl for 2004, versus its previous estimates of $26.00 and $21.00, respectively.
“We are raising our earnings and cash flow estimates to reflect the higher reference price deck. We should note that the full impact of higher prices will likely not flow through to the bottom line,” said Robertson. “Some of the increase will be absorbed in wider regional basis differentials and higher production taxes. Also, increased earnings by most companies will trigger higher levels of cash taxes.
With the new 2003/2004 price deck in place, the analyst said aggregate earnings per share for Lehman Brothers’ coverage universe is likely to increase by approximately 25% and 70%, respectively, and cash flow estimates by roughly 12% and 22%. “The largest estimate changes are for the more gas-levered names in our universe that operate in the Gulf Coast Basin-namely Comstock Resources, Houston Exploration. Westport Resources and Tom Brown,” he said
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