Lehman Brothers analysts lowered the full-year 2003-2004 natural gas price forecasts, but noted that prices will remain volatile “as they react to shifting demand patterns against the backdrop of a depleting production base.”

The full-year ’03 price forecast estimate was dropped 20 cents to $5.45/MMBtu, the 2004 forecast is 25 cents lower to stand at $4.25. In its “Oil & Gas: E&P (Mid-Cap)” report, Lehman also introduced a 2005 forecast of $4/MMBtu, after speculating just weeks ago that long-term gas prices could average around $4.50/MMBtu.

“Our revised natural gas price outlook reflects the bearish storage injection pattern which has persisted over the past several months as the market has been able to find ‘an extra’ 2.5-3.5 Bcf/d to inject into storage without the need for higher prices,” said analyst Jeffrey W. Robertson. “The market is positioned to reach a full storage level of around 3 Tcf by the end of October, assuming weather-normalized storage injection levels continue to run 2.5-3 Bcf/d above normal.”

The Energy Information Administration (EIA) reported another massive gas storage injection last week for the week ending Sept. 12. The EIA said 102 Bcf of gas was injected into storage bringing working gas levels to 2,588 Bcf, only 120 Bcf less than the five-year average.

Lehman analyst Thomas Driscoll said, “We are disappointed by the relatively modest natural gas prices that have prevailed over the past two months despite the need to inject large quantities of gas into storage.” The revised forecasts assume that gas prices will average 16-17% of WTI oil prices for the rest of 2003 and will average 17% in 2004 and 2005. “This price relationship implies that natural gas prices will trade below No. 2 heating oil prices.”

The “very strong” storage injection rates “are likely to lead to weak storage withdrawal rates this coming winter,” said Driscoll. Assuming average supply/demand patterns, he projected that season ending (March 31, 2004) storage will be about 1,150 Bcf.

Robertson noted that for exploration and production companies, the revised commodity price outlook would have a neutral impact on earnings per share (EPS) and price targets, but the new price deck “clearly benefits those companies with an ‘oilier’ production mix and hurts those with a ‘gassier’ production mix. On average, we are lowering our 2003 EPS and cash flow estimates by 4% and 2%, respectively. In regards to 2004, we are lowering our EPS estimates 2%.”

The price targets, said Robertson, are based on a multiple of forward-year pre-interest cash flow estimates, which are predicated on “mid-cycle” benchmark prices. The long-term gas price benchmark estimate of $4 “reflects a 10-11% decrease over our previous estimate. However, we assume that approximately half of the lost gas revenue will be made up in production gains of approximately 5% per year (beginning in 2005). As such, we are reducing target prices for the ‘gassier’ producers in our universe.”

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