Investors’ recognition of natural gas and oil price sustainability and resulting oilfield activity levels will lead to another banner year for energy investors, with gas prices expected to average $7.25/Mcf, said Raymond James analysts Monday.
For 2005, the analysts forecast the low $40s/bbl range for oil, with U.S. gas prices moving toward a 6:1 ratio with oil prices. Normally, the average oil/gas price ration would be 5.5:1, “but given the larger-than-expected current gas storage volumes due to the mild 2004 summer, this ratio may not materialize in 2005.” Assuming Btu parity of 6:1 and the oil forecast, Raymond James is setting the fair value for gas in 2005 between $7 and $7.50.
Analysts J. Marshall Adkins, Jeffrey L. Mobley and Wayne Andrews noted in their “Stat of the Week” that since bottoming near $4.50/Mcf in September, “prices have staged a massive rebound, peaking above $9 in October. While the recent drop in oil prices spilled into the gas market as well, gas market pricing remains strong. We remain bullish on long-term gas fundamentals.”
Over the long term, the analysts said gas prices should return to the 5.5:1 crude oil to gas price ratio, which could “easily” be achieved with a normal to colder-than-normal winter weather scenario. In this case, they said at $40/bbl, the 5.5:1 ratio would set gas prices in the low $7s/Mcf range.
“We expect domestic gas supply to fall by 2% to 4% per year over the intermediate term. That, plus a strong U.S. economy and favorable fuel-switching ratios, should eventually result in gas prices trading at or near Btu parity with petroleum liquids.”
For exploration and production (E&P) and oil service stocks, the Raymond James analysts noted that the energy stocks had “massively outperformed” the stock market in 2004, and further strength is expected this year. “We are projecting that the E&P Index may gain up to 30% in 2005,” they said, and rising E&P cash flow “should lead to continued growth in capital expenditures, particularly on drilling. After a nearly 25% year-over-year increase in capital spending for our E&P coverage universe, we are looking for another 20% to 25% in 2005.”
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