Earnings report season is quickly approaching for the energy sector, but some natural gas-focused investors may look beyond 1Q2009 profits to hear what’s ahead in the oversupplied domestic markets. Some energy analysts don’t foresee gains in gas prices until 2010, and at least one analyst thinks it is an opportune time for the majors to build their portfolios both onshore and offshore in North America.

ConocoPhillips, one of North America’s biggest gas producers and energy marketers, will lead off for the majors with quarterly results on April 23. Chevron Corp., ConocoPhillips and Marathon Oil Corp. all said in interim reports this month that their gas and oil output is higher sequentially from 4Q2008, but they still expect to have underwhelming financial results because of lower commodity prices (see Daily GPI, April 15; April 14; April 3).

Oppenheimer & Co.’s managing director of oil and gas research this week downgraded ExxonMobil Corp., Chevron, ConocoPhillips, Royal Dutch Shell plc and BP plc to “market perform” from “outperform.” Fadel Gheit said in a note that the majors have to begin buying North American assets to build their production and draining reserves. The majors, he wrote, benefited in the last half of 2008 because investors looked for safe investments. Now those same investors are favoring smaller companies with “higher growth potential.”

The majors, still cash rich, are reserves poor, Gheit noted. Going into the 1Q2009 earnings season, he said energy analysts may reduce their estimates on the majors, which will hurt stock valuations. To blunt that effect, he said the majors might be considering “mega-mergers” to allow them to reduce their capital spending and operating costs, and in turn pave the way for higher earnings ratios.

Still, while a merger among the biggest producers is a possibility, there may be too many regulatory hurdles, Gheit admitted. And those regulatory obstacles make those types of mergers “less likely,” he said.

In the current economic climate and with the political risks overseas, the majors may build their base in North America — especially in onshore natural gas shale plays and in the Gulf of Mexico (GOM), said Gheit. Many of the majors already have a healthy portfolio of North American and deepwater GOM assets.

“We think the current industry environment represents a unique investment opportunity for oil majors to establish or increase their presence in areas with significant growth potential,” said the Oppenheimer analyst. “If mega-mergers are deemed off the table by regulators, we expect cash deals for assets and stock deals for companies.”

The only merger of note in recent months is the friendly takeover by Calgary-based Suncor Energy Inc. of Petro-Canada for C$19.6 billion (see Daily GPI, March 24). The U.S. Federal Trade Commission Wednesday approved the merger (see related story), and now the companies are awaiting, among other things, Canadian regulatory approval.

For the gas-directed independents, investors and analysts will be looking at other factors to determine their strength going forward. One issue will be the amount of gas that is hedged and at what price, said Dan Pickering of Tudor, Pickering, Holt & Co. Securities Inc. (TPH).

For instance, EOG Resources Inc. said it expects to record a 1Q2009 gain of $351.4 million because of the increased value of derivatives contracts used to lock in gas prices. However, Pickering was more interested in EOG’s additional gas hedges. Those additions, and the prices, “support our gas worries,” said the TPH analyst.

EOG added 100 MMcf/d swaps at $4.57/MMBtu for June-October, giving it a total 710 MMcf/d swapped and 40% of 2009 gas hedged at $9.20/Mcf.

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