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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (46467)	11/23/2005 9:20:02 AM
From: Dennis Roth	Read Replies (1) \| Respond to of 206316

Western Gas (U/A): Restatement does not alter views on assets, valuation - Goldman Sachs - November 22, 2005 Western Gas announced it will restate non-cash mark-to-market valuation changes for natural gas storage and transportation contracts on its 2004 10- K and for the first and second quarters of 2005. While it is never positive to see earnings restatements, especially in an environment where greater auditing scrutiny is expected, these changes have no impact on cash flow and do not impact our outlook for Western Gas' assets. For this reason, our views on the stock are unchanged. We continue to rate Western Underperform relative to an Attractive coverage view, although increasingly if industry perception on the viability of the Powder River Basin improves, the attractiveness of Western's assets to potential consolidators should rise. Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti. ======= Western Gas Resources (U/A): Production momentum in Powder River rising November 09, 2005 Western Gas Resources' momentum in the Powder River Basin continues to improve as more wells that have been dewatering come online and permitting delays have subsided. The Pinedale Anticline continues to show meaningful growth at superior returns, although Western's Pinedale position is much smaller than that of Ultra Petroleum and Questar Corp. We continue to rate Western Underperform relative to an Attractive coverage view because we see more upside from other visible growth small- and mid-cap E&Ps, though the potential for industry interest in the Powder River Basin is likely increasing. We believe that assuming above-consensus growth (24% in 2006 and 33% in 2007), Western's implied E&P valuation (7.3x 2006 EV/debt- adjusted cash flow) does not seem to be unfairly discounted relative to other unconventional gas peers. KEY COMPANY-SPECIFIC CATALYSTS (1) Growth from the Big George coals. Coal-bed methane production in the Big George coals of the Powder River Basin continues to improve as more wells previously dewatering begin to come on line. From our vantage point, the growth is expected, although considering previous production delays in 2004 and 1H 2005 Powder River Basin production it is understandable that there is some Street relief in seeing the growth actually appear in quarterly results. Western guided towards the upper end of its total company 15%-20% production growth range for 2006, versus our 25% estimate. At 909 gross producing Big George wells, average production is 154 Mcf/d per well, which still seems below where well performance should be based on average production plateaus of 325 Mcf/d per well though is an improvement from the 130 Mcf/d level six months ago. (2) Pinedale Anticline development and deep exploration. Western continues to benefit from very strong production growth and momentum from the Pinedale Anticline. We believe the combination of winter drilling approval at Questar Corp.-operated acreage combined with downspacing to 10 or 20 acres depending on the operator will allow for continued strong growth into 2006. The potential for further recoverable resource from deeper formations at Pinedale would positively impact Ultra Petroleum, Questar and Western (in that order of exposure), though more detailed results are not expected until late 2Q 2006. (3) Cost structure. Western continues to have the highest operating cost structure among unconventional gas E&Ps. The company's differential, projected at of $2.50 per Mcfe in 2006 (based on $10 per MMBtu Henry Hub) is negatively impacted by a 15% loss of production due to fuel and shrink. Production costs, which include gathering/transportation and lease operating expense are expected at $1.80 per Mcfe, much higher than peers due to what we believe to be greater gathering/transport expense in the Powder River Basin and temporary higher lease operating expense than peers due to dewatering wells. While Western's finding and development costs are much lower than peer companies, we question whether this will be lasting considering that DD&A expense per Mcfe is in-line with other unconventional gas companies. All in all, Western's returns are in-line to slightly below average and we continue to have greater concern regarding results from the Powder River Basin relative to the Pinedale Anticline, Barnett Shale and Fayetteville Shale. (4) Industry consolidation in Western's operating basins. We believe that rising momentum in the Powder River Basin by key players could increase the likelihood of consolidation potential for Big George assets. We believe that Western's non-operating position in the Pinedale Anticline would be desirable to other Pinedale players. Other Powder River Basin players such as Petro-Canada have expressed interest in bolt-on acquisitions. This leaves the midstream business that Western management declined to split off from the company's E&P business following a recent study. We believe there could be interest in Western's midstream assets, and that the company would contemplate a full sale to the extent that there are interested buyers for Western's E&P assets. 3Q 2005 CASH FLOW SLIGHTLY BETTER THAN EXPECTED Western Gas reported EPS and cash flow above expectations. EPS was $0.88 versus our $0.74, though after non-cash gains EPS was more in-line at $0.76. Production was the strong point at 177 MMcfe/d versus our 174 MMcfe/d estimate, and realized prices were also above expectations. Strong E&P revenues were offset by higher SG&A costs and lower overall midstream cash flow. Total company EBITDA was $110 million versus our $109 million estimate, and operating cash flow was $111 million versus our $108 million estimate Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti.