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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 (51672)	10/25/2005 9:18:53 AM
From: Dennis Roth	Respond to of 206085

Gas E&Ps favored with winter looming - Launching on CHK and SWN, downgrading STR. - Goldman Sachs - October 24, 2005 We prefer E&P stocks more exposed to natural gas and believe equity valuations are already assuming a warm US winter following the recent pullback. We are now assuming $10 per MMBtu for 2006 Henry Hub natural gas prices, and we slightly favor growth companies in East Texas and the Mid- Continent versus the Rockies. We are initiating coverage of Chesapeake Energy with an In-Line rating and Southwestern Energy with an Outperform rating while we are downgrading Questar to In-Line. Our top picks are XTO, NFX, BBG, SWN, and ECA, and our coverage view remains Attractive. Investment funds affiliated with The Goldman Sachs Group, Inc. have a principal investment in Bill Barrett Corp. (BBG). As a result of its position in BBG securities, The Goldman Sachs Group, Inc. may be deemed an affiliate of BBG. Please see our detailed 37-page report, "Gas E&Ps favored with winter looming." If you are on our e-mail distribution list, a .pdf will be sent today. NATURAL GAS PRICES COULD REMAIN HIGH INTO 2006 We believe that natural gas prices could remain high into 2006 and could further spike in the event of a cold winter. While natural gas prices have, for the last two years, been a follower of crude and refined product prices, a natural gas inventory crisis could cause natural gas prices to lead refining margins higher. We now estimate Henry Hub gas prices of $10 per MMBtu for 2006 and believe that a warm winter is priced into oil and gas equity valuations. THE ROCKIES REMAINS A MAJOR SOURCE OF EXPECTED GROWTH ... We continue to believe that the Rockies will show superior growth and returns over the medium to longer term. However, we have lowered our rating on Questar to In-Line from Outperform, reflecting strong price performance and more limited near-term exposure to natural gas prices. We continue to recommend EnCana and Bill Barrett Corp. because of exposure to the Piceance Basin where we see multiple catalysts in the next six months. ... BUT OTHER GROWTH REGIONS HAVE IMPROVING NEAR-TERM CASH FLOW EXPOSURE East Texas and the Mid-Continent should show a greater combination of production growth and natural gas price exposure vs. the Rockies in our view. While Mid-Continent differentials could widen, we nevertheless see a greater widening in the Rockies. We initiated coverage of two Mid-Continent producers - Southwestern Energy with an Outperform rating and Chesapeake Energy with an In-Line rating. Our top pick remains XTO Energy WE SEE ATTRACTIVE VALUATION FOR BOTH UNCONVENTIONAL AND CONVENTIONAL E&Ps While many conventional E&Ps lack the visibility of production growth relative to unconventional gas E&Ps, we nevertheless see valuation improving for many conventional E&Ps. Newfield is our top pick among conventional E&Ps, while Cabot Oil and Gas is our top In-Line rated stock. WE ARE INITIATING COVERAGE OF CHESAPEAKE WITH AN IN-LINE RATING We believe that Chesapeake has the most upside to increased commercially recoverable resource from higher natural gas prices relative to its peers. Given the recent pullback in oil and gas equities, we believe shares of Chesapeake are attractive. Our In-Line rating is a function of more attractive opportunities at other visible large-cap growth E&P stocks at present, in part due to Chesapeake's peer-average cash-on-cash returns. At 4.4x 2006 EV/DACF, valuation is attractive versus other visible growth peers, although mid-cycle valuation is at a premium to peers. We see 29% upside to a $38 traditional peak value. WE ARE INITIATING COVERAGE OF SOUTHWESTERN ENERGY WITH AN OUTPERFORM RATING We see further upside from developments in the Fayetteville Shale, an area where we expect consolidation over the coming years. We believe Southwestern's management has been very conservative in its portrayal of the Fayetteville and that the company for now has the best position relative to its peers. Southwestern has attractive collar hedges that should still allow it to benefit from higher-than-expected winter natural gas prices. At 9.5x 2006 E&P, Southwestern trades at similar levels with Questar and other mid- and small-cap visible growth peers. We see 34% upside to a $86 traditional peak value. WE ARE DOWNGRADING QUESTAR CORP. TO IN-LINE FROM OUTPERFORM We believe that the company is now trading closer to parity relative to estimated mid-cycle and peak values for other E&P companies, which had been one of the key reasons for our recommendation. While we continue to believe the Pinedale Anticline will generate superior growth and returns, we believe that for Questar there are few key catalysts on the horizon, and the company has hedged a higher-than-average portion of winter 2005-06 natural gas production at fixed prices. We do not expect to get a clear view of deep Pinedale potential until mid-2006 at the earliest. Ultra Petroleum remains the most exposed among Pinedale players, although it continues to trade at steep premiums to estimated net asset value. UPDATED ESTIMATES We have updated our estimates for E&Ps, domestic oils and integrated oils to reflect a $10 per MMBtu Henry Hub natural gas price for 2006 versus $9 per MMBtu previously and an $11 per MMBtu price for 4Q 2005 versus $9 previously. New estimates for Forest Oil reflect the expected splitoff of the company's Gulf of Mexico assets. New estimates for EnCana include the announced sale of its assets in Ecuador. New estimates for Pioneer Natural Resources include expected natural gas production from South Africa. New estimates for The Houston Exploration include the recently-announced development disappointments. New estimates for Talisman Energy include the recently-announced acquisition of Paladin Resources. In addition, we have adjusted 3Q 2005 and 4Q 2005 earnings estimates for expected hurricane-related impacts and have made other minor company adjustments. A summary of our EPS revisions is in the enclosed exhibit. Goldman Sachs & Co., and or one of its affiliates, is acting as advisor to Talisman Energy Inc. in the proposed offer for Paladin Resources PLC, and as such is an associate of Talisman Energy Inc. for the purpose of the Takeover Code. Goldman Sachs & Co., and or one of its affiliates, will receive a fee for this advisory role. Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Occidental Petroleum Corporation in the proposed acquisition of Vintage Petroleum Inc. Goldman Sachs & Co., and or one of its affiliates, will receive a fee for its financial advisor role. Goldman Sachs & Co., and or one of its affiliates, is acting as advisor to Pogo Producing Company in the proposed sale and or partial sale of one of their division or operating units. Goldman Sachs & Co., and or one of its affiliates, will receive a fee for this advisory role. Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Pogo Producing Company, Inc. in the proposed acquisition of Northrock Resources from Unocal Corporation. Goldman Sachs & Co., and or one of its affiliates, will receive a fee for its financial advisor role. 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.

To: Dennis Roth who wrote (51672)	11/10/2005 8:50:41 AM
From: Dennis Roth	Read Replies (2) \| Respond to of 206085

Integrated oil, E&P, and R&M trading update -- Take advantage of political and weather noise to add on weakness - Goldman Sachs November 09, 2005 We believe that investors should take advantage of political noise and early warm winter weather to add to positions in the sector on weakness; we reiterate our Attractive coverage view. Our key takeaway from today's Senate hearing on "Energy prices and profits" is that constructive public policy is unlikely to impact oil supply/demand fundamentals any time soon. DOE statistics show that gasoline demand continues to recover from hurricane-induced weakness, suggesting so-called "demand destruction" was temporary and more a function of a lack of available supply as opposed to the start of a multi-year, price-driven downturn. While excessively warm winter could further pressure commodity prices, we believe energy equities are already discounting near "mid-cycle" conditions that are more consistent with 8%-10% returns on capital rather than the 20%-30%+ we expect for 2006 and 2007. SENATE HEARINGS SUGGEST CONSTRUCTIVE PUBLIC POLICY STEPS TO ALLEVIATE TIGHT SUPPLY/DEMAND FUNDAMENTALS ARE UNLIKELY ANY TIME SOON We have been skeptical of the view that meaningful public policy measures would be taken to alleviate tight supply/demand fundamentals. The November 9 United States Senate hearing on "Energy prices and profits" featuring the CEOs of the three largest US oil companies--Exxon Mobil, Chevron, and ConocoPhillips--plus the heads of the US operations of BP and Royal Dutch Shell further confirms our view that necessary public policy steps to proactively reduce demand and increase supply are unlikely to be forthcoming. We continue to believe that an energy crisis (what we refer to as our "super spike" view) that ultimately brings about a looser supply/demand balance is more likely. Four key areas to consider: (1) Conservation is needed. We believe a more constructive way to bring about lower energy prices would be for consumers to hear the message that high energy prices are a function of tight supply/demand fundamentals, geopolitical turmoil, and catastrophic hurricanes rather than "price gouging" by "greedy" oil companies. The latter, politically expedient message, in our view, lessens the likelihood of sustained conservation measures being taken. Perhaps a hearing should be held on why Congress has not created better disincentives to the continued production of low-mileage sport utility vehicles. (2) Windfall profit taxes will not increase supply or lower demand. It remains our view that the ultimate passage of a so-called "windfall profits" tax is unlikely. However, this has been a hot topic of late. The reality is that taxing profits will neither decrease energy demand nor increase energy supply. Changing taxation policies is a risk in energy investing around the world. It is our view that just as oil service and raw material cost inflation has served to boost spot and "normalized" energy commodity prices given the need to earn a return on capital and given the propensity for companies to invest less when faced with volatility and uncertainty, so to might higher taxes further raise likely commodity price trading ranges. We fail to see how higher oil company taxation in the United States would lower energy prices for consumers. (3) The free market miracle: Gasoline prices are now below pre-Katrina levels. We note that gasoline prices have retreated to below pre-Katrina levels. Yet, many of New Orleans' poorest residents remain displaced. We conclude oil companies have outperformed governments following the catastrophic hurricanes. (4) Crude oil prices are set in free markets by physical and financial traders. Based on the testimony we heard (note: we were unable to witness the entire hearing), we believe oil company executives (and one in particular) did not do a very good job educating the senators on the fact that crude oil prices are set in a highly competitive free market through the interaction of many physical and financial oil traders around the world--not by the decree of one large oil exporting country and oil company (as was the example given). If traders were to bid the crude oil price too high and there really existed excess supply, the highly competitive nature of the oil industry, in our view, would result in that excess supply being sold at what would then prove to be an unsustainably high price that subsequently would fall. If the higher price does not bring about higher supply or lower demand, then we think one can usually conclude that the higher crude oil price was needed to satisfy or even ration demand. This is the environment we think we are in today. DOE INVENTORY STATS POINT TO RECOVERING GASOLINE DEMAND We continue to believe that underlying demand for energy remains strong, once adjustments are made for hurricane-induced supply disruptions and early warm winter weather. We note that gasoline demand continues to rebound as Gulf Coast refining supply has been brought back on-line and is moving back into positive territory on a year-over-year basis. Even distillate demand we find to be surprisingly healthy in light of the very warm weather being experienced in the US northeast--the key winter demand market. We believe investors need to differentiate between involuntary demand reductions brought on by a lack of available supply (as has been the case, in our view) and the more troubling price-driven, voluntary demand reductions brought on by a weak economy or sustained conservation measures (which would follow a multi-year "super spike" period that we think has only just begun). We believe all indications are that underlying demand remains healthy, with consumers not yet embracing a sustained, large-scale conservation effort. Furthermore, Goldman Sachs economists continue to paint an overall picture of world economies that is supportive of at least trend oil demand growth. RISK/REWARD FOR ENERGY EQUITIES FAVORABLE FOR INVESTORS THAT CAN LOOK PAST POLITICS AND WEATHER NOISE We believe the intermediate- to longer-term risk/reward for oil equities remains very favorable for investors that can look past US political noise and the very warm start to the winter heating season. On the latter point, we recognize that a super warm winter could further pressure commodity prices. However, with industry balance sheets ultra healthy, underlying supply/demand fundamentals continuing to appear robust, ongoing geopolitical turmoil a fact of life, and oil equity valuations now approaching "mid-cycle" levels consistent with a very conservative 8%-10% return on capital rather than 20%-30%+ we anticipate for coming years, we believe the risk/reward has become very favorable for investors that can look past short-term political and weather noise. 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: Arjun Murti, Brian Singer.