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

To: upanddown who wrote (94324)	10/30/2001 5:29:08 PM
From: Terry D	Read Replies (1) \| Respond to of 95453

Ellen K. Hannan - Oil & Gas E&P Outlook for E&P Stocks -Bullish, Bearish, Bullish All of the major oils have reported Q3 results (only BP and Shell are left) as well as all of the larger E&P companies. While financial results were pretty much as expected, with lower commodity prices year over year, the trends in production, particularly domestic natural gas, should give consumers a pause. After reaching a high of 1050 rigs drilling for natural gas (in mid-July), the rig count has dropped to the current level of about 876 last week (vs. 855 same time last year). Despite the record level of activity, production trends show that the industry, on average, has been drilling a lot of marginal wells. Year-to-date, production of gas by the majors is down as estimated .1% and has been declining steadily throughout the year. Production by our E&P universe is up about 9% but the bulk of the increase came from acquisitions. Overall, according to preliminary Department of Energy numbers, industry production of gas is down 1.8% through nine months, despite a record number of rigs drilling new gas wells. As expected, demand is down. As prices eroded throughout Q3, companies responded by scaling back drilling activity. Despite the sharp rebound in spot and futures prices over the last four weeks, we do not get a sense that most companies are planning to ramp up activity quickly. While we are most likely witnessing several unusual events which have increased the volatility in gas prices, the production numbers suggest it will be difficult for the domestic natural gas industry to add material new sources of supply from the Lower 48. As and when demand rebounds, we will draw more and more on sources located in both eastern and western Canada, Alaska and imports. If companies take the capital conservation route in times of high price volatility, this trend can only become more pronounced over time. The near-term direction of commodity prices will determine the direction of the stock prices for the E&P sector. We expect oil and gas prices to remain relatively uncoupled with the unprecedented volatility surrounding gas prices, despite burgeoning inventories on hand for the winter heating season. Oil prices will be subject to events that unfold on the world stage, in addition to weakening demand. If the natural gas rig count continues its decline, and we believe it will, and companies remain conservative in their capital spending plans, we look for gas prices to remain stubbornly higher, albeit with greater volatility. While the stock have rebounded along with the recent upswing in gas prices, we would continue to hold our Buy and Attractive rated names for near-term relative out-performance. The companies that appear most attractive to us today are those that are trading at reasonable price-to-cash flow multiples based on an outlook for $2.50/mcf in 2002 and are equal to or below their implied net asset values starting at $2.50/mcf gas and $20/bbl oil. The stocks that continue to stand out under these measures include: EOG Resources (EOG, Buy), Apache Corp. (APA, Buy), Noble Affiliates (NBL, Attractive) and Stone Energy (SGY, Buy). All have strong balance sheets, are relatively levered to natural gas and have reasonable prospects for internally generated growth.