Taking into account strong gas futures prices despite thewarmest winter on record, a bleak supply picture and projections ofa very hot summer, PaineWebber reported an increase in its year2000 projection of composite spot gas prices from $2.40/MMBtu to$2.50/MMBtu. The firm’s report, issued yesterday, also indicatedthat the time is right to invest in diversified energy companies.

Ron Barone, a PaineWebber analyst and author of the report, alsowent a step further and raised his 2001 composite spot projectionfrom $2.40/MMBtu to $2.50/MMBtu. The new 2001 estimate isconsiderably higher than the Wall Street consensus estimate of$2.46/MMBtu for the same period.

“These changes reflect ongoing increases in weather-normalizeddemand, depressed deliverability, as well as the reality that thedrilling response, while increasing, remains limited.”

The “lackluster” rig count, as Barone called it, was a majorfactor in the price increase. According to the report, the totalU.S. rig count was 768 for the week ended March 24. While up from526 for the month of March 1999, the report noted the total is downfrom 815 in mid-December. “We believe a total U.S. rig count inexcess of 1,000 is necessary to replace production. The reality isthat the 2000 rig count will remain well below 1,000 because offinancial and operational constraints.”

Supplies from Canada won’t help much this year, Barone said inthe report. The 1998-99 production cutback also limited supply fromthe North and Canadian imports are only expected to amount to 3.56Tcf this year, marking “only” a 6.6% increase from 1999. As acomparison, Barone said 1999 Canadian imports grew 9.4% in 1999.The Alliance system, which is being hailed as one of the majorimporters of Canadian supply when it becomes operational later thisyear, will only transport 65% of its available capacity, Baronesaid. He does not expect the pipe to reach its full potential until2002-2003.

While the supply picture is cloudy, Barone sees clear sailingfor increased demand. Overall, gas-fired generation demand plusstorage refill injections could exceed available supplies by 2Bcf/d this summer. Several gas-fired power plants are expected tobe connected to the electric grid in the near future. Tighternitrous oxide and sulfur dioxide restrictions will be implementedthis ozone season, limiting output from oil and coal-fired powerplants. Oil prices remain relatively high, which should causefuel-switching utilities to use gas more.

These factors combine with a summer outlook issued by theNational Oceanic and Atmospheric Administration calling forabove-normal temperature averages throughout most of the U.S. tocreate a very rosy demand picture, Barone said.

With gas prices expected to continue rebounding through thesummer, PaineWebber also expects higher profits for companies inthe industry as well. The report outlined activities of some majorgas players and gave a positive outlook on the industry. In fact,the firm raised its estimates and price targets for Coastal, Enronand Equitable Resources. It also upgraded Williams from neutral toattractive.

“In short,” Barone said in the report, “it has been a whilesince the fundamentals of this industry — or the average companywithin [the industry] —have been as strong as they stand today.”

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