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To: Dennis Roth who wrote (124433)	9/25/2009 11:16:11 AM
From: Dennis Roth	2 Recommendations Respond to of 206177

E&P Stat Sort 2010 Curve Rises to $6, Attractive Hedge Level for Debt-Laden Producers Seeking Growth (Tables Attached) 20 pages, 20 Exhibits, 360 KB Link: sendspace.com Excerpt: 2010 Curve Rises to $6.11, Hedging Looking More Attractive: The 2010 natural gas curve has now risen to $6.11 per MMBtu after trading in the $5.50 to $5.60 per MMBtu range for much of September. With this move, the 2010 curve has moved back above $6.00 per MMBtu for the first time since August 6. We think producers may view this as an opportune time to layer on significant additional hedges given heavy balance sheets and a desire to pursue volume growth next year. The rig count is rising and producers may justify higher drilling by citing 1) reduced service costs (down 30-40%), 2) better well productivity and 3) greater liquidity on repaid bank debt. But, we think balance sheets are very levered by historical standards and frequent equity infusions will be needed with funding gaps evident. 2010 Gas Hedging at 40% But Likely to Rise We estimate that producers are currently 40% hedged on next year's natural gas production (at average floor prices of $6.01 and swap prices of $7.35) compared to 47% hedged on 2009 gas production (at average floor prices of $7.57 and swap prices of $7.21). Meanwhile, hedging is high versus normal. Last year, producers were just ~30% hedged on natural gas production in September 2008 (at average prices of ~$8.50 per MMBtu swaps and ~$8.00 per MMBtu floors). Higher yr/yr hedging levels likely signals producer desire to ensure growth next year amid uncertainty regarding the 2010 gas market and weak futures curve prices in the past couple months. High Leverage May Encourage Hedging As Well We think that producers will also be encouraged to add hedges at these levels to manage still heavy pro forma leverage and expected funding shortfalls for next year. Exhibits 3 through 6 show that producer debt balances remain high, with debt-per-PDP Mcfe at $1.37 and debt-to-2009 hedged cash flow at 2.1x. Historical norms are in the ~$0.60 per Mcfe and 1.0-1.5x range, respectively. Also, interest per Mcfe has risen 80% to $0.62 per Mcfe since Q2’05. Moreover, we estimate that gas-focused producers will see a significant funding shortfall assuming an intention to lift capex to grow. Our Take on the E&Ps We continue to see the potential for a slower than anticipated recovery in the gas market as supply may not fall as fast as once expected and challenges our current $6.50 per MMBtu 2010 price outlook. The more gradual dip in supply is driven by better funding following ~$21B in capital raises to date, planned rig additions later this year as producers are poised to chase growth in 2010 and better capital productivity from new plays. We thus see better value in oily stocks over gassy names and overall recommend low cost producers with clean balance sheets. Our favorites include APA, NBL, EQT and WLL while we remain cautious on CHK, DVN and EOG (which have light hedge positions).

To: Dennis Roth who wrote (124433)	9/25/2009 11:55:37 AM
From: Dennis Roth	1 Recommendation Read Replies (3) \| Respond to of 206177

EIA Reports 67 Bcf Fill Higher Winter Gas Prices Could Reverse Coal Switching 11 pages, 12 Exhibits, 190 KB Link: sendspace.com Excerpts: The EIA reported a 67 Bcf refill for the week ended September 18 compared to last year's 54 Bcf refill, the 69 Bcf 5-year average fill and the 68 Bcf consensus fill (range: 61-78 Bcf). Cooling Degree Days came in at 40 and were 2% below last year but 14% above normal. Power generation for the week was flat yr/yr but is down 5.2% YTD. Storage Essentially Full in Producing Region, Market Looking to Q4: Storage levels now stand at 3,525 Bcf, which is 485 Bcf (16%) above the 5- year average and 509 Bcf (17%) above last year. Following today's injection, storage is now closing in on the 2007 season-end record mark (3.545 Tcf) with a month and a half to go until October 31. Although storage continues to track towards ~4.0 Tcf, we think that season-end levels will likely finish closer to 3.7-3.8 Tcf given producer shut-ins (i.e. ECA has shut-in some 300- 400 MMcf/d), downtime at Boardwalk's Fayetteville lateral (now set to restart on Oct. 10) and reduced run-times at Independence Hub. Storage refills will also be constrained as the Producing and West regions are essentially already full at a respective 94% and 95% of capacity. Likewise, we would expect very light refills in October. Post the report, the October contract is trading at $3.79 per MMBtu (up 3% wk/wk). The 2010 strip has followed the front-month up the past week and is now trading at $5.98 per MMBtu (up 2% wk/wk). Gas has Taken Share from Coal YTD...: We have seen many signs year- to-date of extensive switching away from higher priced coal to natural gas in the power generation sector. Just today, Southern Co. (SO) stated its demand for gas would be up 24% yr/yr in '09 (to 0.85 Bcf/d) as it believes coal burn economics cannot compete with gas at prices below $5.50 per MMBtu. Natural gas is currently running $3.44 per MMBtu (HHub cash), which is below our estimated gas equivalent coal prices of $4.63 per MMBtu for Central Appalachia, $4.17 per MMBtu for Northern Appalachia and even below the $4.16 per MMBtu for Powder River Basin (8,800 Btu) coal. We are anecdotally hearing as much as 2-3 Bcf/d has switched away from coal to burning natural gas. With season-to-date refills down just 0.5 Bcf/d yr/yr, we think switching helped partially offset bearish factors such as continued supply growth (+0.4 Bcf/d yr/yr in June), weak industrial demand (down 1.9 Bcf/d yr/yr in June) and higher nuclear utilization (+1,200 bps yr/yr). Coal Stocks Building, Even Higher on BTU Basis The EIA's July Electric Flash report confirms the trend, with July generation from the coal- fired plants down 14.8% yr/yr versus a 1.8% increase in gas-fired power generation. On a year-to-date basis, coal-fired generation is down 13.1% compared to a 1.8% increase in gas-fired power output. These trends correspond with utilities' reduced demand for coal versus natural gas. For July 2009, utility consumption of coal was down 13.6% yr/yr (to 84.9 million tons) while their demand for natural gas was up 0.5% yr/yr (to 25.9 Bcf/d). On a year-to-date basis, utlities' consumption of coal is down 11.5% versus a 1% increase in natural gas demand. As a result, coal stocks at utilities have hit record highs, with July inventories at 196.2 million tons, up 36% yr/yr and representing 70 days of supply. With the reduction in 'flexing' of steam coal onto the met export market, inventory levels are even higher on a BTU adjusted basis with bituminous stocks up 61.6% yr/yr versus sub- bituminous (PRB) stocks up 18.6% yr/yr. ...But Higher Winter Gas Prices Could Trigger Reversal to Coal We think it’s worth considering the impact a winter gas price recovery could have on the current level of coal-to-gas switching. Should current Dec-09 and Jan-09 futures prices hold in at $5.43 and $5.70 per MMBtu respectively, we could see a large chunk of the 2-3 Bcf/d reverse back to coal burn. This would clearly weigh on overall natural gas supply/demand balance and potentially offset the supply declines many expect to see by year-end.