To: Frank who wrote (72449 ) 9/7/2000 11:40:22 AM From: Terry D Respond to And something for the gas house gang - For the first time, natural gas prices are keeping pace with rising oil prices, somewhat coincidentally perhaps. The most recent move came after the weekly gas storage injection survey was released by the AGA. Injections into storage last week were 42 BCF (vs. 69 BCF the same week a year ago) and 63 BCF 5-year average for this time of year. Storage now looks to be at 2,144 BCF, some 377 BCF less than last year. We project that storage will end the refill season (11/1) at about 2.650- 2,700 BCF, some 10-12% below last year. We believe we are seeing a bit of a short squeeze (in both oil and gas). However, the race is on to get storage in adequate shape to be ready for winter which, coupled with the extreme heat covering the southern part of the country and the pipe outage into California, should keep prices well above the $4/mcf mark as we move into winter. We also continue to believe that price volatility will rule the day. The number of rigs drilling for gas has hit a new all-time high. As of last week, the BHI rig count showed 816 rigs drilling for gas. This rig count bottomed at 350 in April of 1999. The last “peak” was 650 in Dec. 1997. However, over the last 11 months. (Oct 1999-Aug 2000), the gas rig count has averaged 650, traditionally a rule of thumb estimate for the cross over point where a higher rig count = higher gas production? Despite an activity level, for almost one year now, that historically would indicate rising production, we recently noted that through the first six months of this year versus last year, production is down over 2%. Thus, we think we are witnessing a lot of activity which is akin to pushing on a string for all the contribution to increased supply. Our E&P universe is currently trading at 4.7x our 2001 estimates of cash flows and 5.3x 2001 estimated EBITDAX, still at the low end of historic ranges. Current futures prices for gas indicate that Q4 is likely to average $5/mcf (versus our forecast of $3.50/mcf). Q101 looks like $4.90, Q201 $4.20/mcf and the year 2001 around $4/mcf. Our estimates need to come up for this year at least and for the beginning of next year as well. We think the momentum should take the group higher. We continue to favor:
