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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: BigBull who wrote (72163)	9/1/2000 3:52:39 PM
From: Big Dog	Read Replies (2) \| Respond to of 95453

From Lehman this morning: This morning we raised our Henry Hub natural gas price forecast as follows: * For 2000 to $3.80 per MMBtu from $3.60. This increase is entirely due to an increase in our fourth quarter natural gas price forecast to $4.96 MMBtu from $4.25. * For 2001 to $4.20 MMBtu from $3.50 MMBtu. * For 2002 to $3.50 MMBtu from $2.85 MMBtu. Continued weak natural gas production levels in both the U.S. and Canada are likely to result in a much more severe natural gas tightness this winter and next than many investors realize. Supply and demand will balance--but perhaps at a very price for natural gas. Furthermore, we now believe that the natural gas price strength will last longer than we had previously thought. Natural gas drilling activity has increased sharply from a quarterly low of 395 average rigs in Q2-99 to an average of 629 rigs drilling for gas in the first half of 2000. Based on our observation of the historic trends in the relationship between gas drilling activity and production we have estimated that we need to see about 650 rigs drilling for gas to maintain production. Thus we had forecast that first half production rates would register only modest quarter-to-quarter declines. We have two theories as to why the production response has been weaker than forecast (1) Perhaps we had underestimated the time lag between drilling and production and (2) perhaps we had underestimated the required level of drilling activity to sustain production. If we had merely underestimated the time lag, the market will ease over the next year; if however production decline curves have steepened or if new wells are resulting in lower initial production rates, the market will remain tight for some period of time. We believe that the major risk to strong winter gas prices is the weather. If we experience winter warmth comparable to the record warmth of a year ago we would lose an estimated 800 bcf of natural gas heating demand. Additional risks would include surging production, slowing demand related to a slowing economy, and lower oil and oil-product prices. However we believe that it is unlikely that we would experience much of a surge in production between now and winter. Although our forecast of an 8 bcfpd tightening in the gas markets this winter assumes that we will experience a normal winter, it does not rely on economic growth. At any rate a 1% change in gas demand equates to 0.6 bcfpd, far less than the 8 bcfpd shortfall in supply that we project. Three risks to our longer-term bullish forecast are apparent. First it is possible that production from either the U.S. or Canada will respond more strongly over the next couple of quarters and alleviate some of the upward pressure on prices. Secondly it is possible that sustained high natural gas prices will quash demand. We estimate that the high prices during the past three months led to a 2-3 bcfpd reduction in demand. A continuation of $4-plus natural gas prices could allow consumers to find other sources of energy and that could lead to further declines in consumption. Third, a significant drop in oil prices will lead to lower heating oil prices. For example a drop in crude oil prices to $20/bbl for WTI would likely provide consumers that can burn No. 2 heating oil a price incentive to switch away from natural gas at prices above a Henry Hub equivalent price of $3.75/MMBtu. We have long been bullish on the outlook for natural gas drilling. On the margin, higher natural gas prices should translate into increased cash flow which in turn should mean more money spent on exploration and production in the U.S. Our enthusiasm for increased numbers of drilling rigs working in 2001 is tempered only by availability of personnel and in certain regions the availability of equipment. Our higher gas price forecast for 2002, however, should mean that the drilling cycle in North America will continue strong beyond 2001. While a 17% drop in natural gas prices ($4.20 to $3.50) could well mean a decline in cash flow for some companies, the absolute price level creates an excellent incentive to explore. In addition, balance sheets have been strengthened by the large increase in cash flows and spending as a percentage wellhead revenue in 2000 and 2001 will be historically low levels. Our favorite ways to invest in the multi-year natural gas and drilling recovery in the U.S. are as follows: Oil Service & Equipment Companies Offshore Drillers BJ Services (BJS) Carbo Ceramics (CRR) Grant Prideco (GRP) Halliburton (HAL) Tidewater (TDW) ENSCO (ESV) Global Marine (GLM) Rowan Companies (RDC) Onshore/Offshore Drillers Onshore Drillers Nabors Industries (NBR) Grey Wolf (GW) Key Energy (KEG) UTI Energy (UTI)