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Natural-Gas Price Projection Raisedby Eric Chenoweth, CFA | 02-23-06 | 3:05PM | E-mail Article | Print Article
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We are making several changes to our natural-gas price assumptions that will positively affect our fair value estimates for numerous companies in the natural-gas industry.

First, we are raising our midcycle price assumption for the NYMEX Henry Hub benchmark to $5.67 per thousand cubic feet (mcf) from $4. Although natural-gas prices have drifted lower recently due to an abnormally warm winter, we based our midcycle price decision on several longer-term trends. Unit costs have been on the rise over the past two years, with the higher-cost, marginal producers experiencing the most marked increases in costs. We don't see this trend changing over the next few years, as firms are paying top dollar to acquire new properties and day rates for rigs are still well above normal. Further, as LNG becomes a larger contributor to supply over the next decade, we expect that it will support our midcycle price. Although LNG could displace high-cost domestic producers, we think that it should improve the reliability of supply--helping to stabilize gas prices near our midcycle price, rather than creating a glut of low-cost gas.

Demand for natural gas has not fallen considerably despite steeper prices in recent years. Although we think industrial consumers could continue to disappear if high and volatile prices persist, the large installed base of gas-fired power plants and home heating customers should help shape a floor for gas prices over the next decade.

Second, we have reduced our long-term inflation rate for natural gas to 3.6% from 6%. The new 3.6% figure matches our inflation rate for oil and reflects our opinion that prices for oil and gas should hover more closely to energy equivalence (roughly 6,000 cubic feet of natural gas per barrel of oil) over the next 10 years than they have in the past. In fact, on an energy-equivalence basis, our new midcycle natural-gas price (adjusted for inflation) equals our oil-price assumption in the third year of our forecast (2008).

Third, we have incorporated seasonality adjustments to improve our near-term accuracy.

Between our methodology changes and new price assumptions, we now expect benchmark natural-gas prices to average near $8 per mcf in 2006, $6.80 in 2007, and $6.20 in 2008. After 2008, we assume prices will grow at our projected long-term inflation rate of 3.6%. Despite our higher assumptions, we still consider recent prices exceeding $10 per mcf extremely high and ultimately unsustainable.

Increases in our fair value estimates will vary. For firms concentrating on oil or those pursuing an integrated strategy, we expect fairly small changes. However, for smaller, independent firms focusing on North American natural-gas production, we expect more significant adjustments to our fair value estimates. Please refer to the valuation section of each company's Analyst Report to view how our fair value estimates are changing on a firm-by-firm basis.


Get our full take on El Paso Corporation, Pogo Producing Company, Houston Exploration, Western Gas Resources, Energy Partners, Ltd., Bill Barrett Corporation, McMoRan Exploration Co., Devon Energy Corporation, Anadarko Petroleum Corp., Whiting Petroleum Corporation, Southwestern Energy Company, Quicksilver Resources, Inc., Chesapeake Energy Corp., EQT Corp., Kerr-McGee, Questar Corporation, XTO Energy, Inc., Encore Acquisition Company, Cabot Oil & Gas Corporation, Williams Companies, Inc., EOG Resources, Cimarex Energy Company, EnCana Corporation, Ultra Petroleum Corporation, Primewest Energy Trust, BG Group PLC
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Analyst Notes
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Analyst Notes
11-03-09 | 10:09AM   Bill Barrett Posts 3Q
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Analyst Notes
10-20-09 | 9:17AM   McMoRan's Drilling Continues in 3Q
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Analyst Notes
11-16-09 | 8:51AM   Devon Repositions
11-04-09 | 11:14AM   Devon Sees Declines in 3Q
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Analyst Notes
11-03-09 | 9:02AM   Anadarko Reports 3Q
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Analyst Notes
10-29-09 | 9:16AM   Whiting Posts 3Q Results
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Analyst Notes
10-30-09 | 8:37AM   Southwestern's Growth Resumes in 4Q
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More Analyst Research Quicksilver Resources, Inc. Full Analyst Report


Analyst Notes
11-09-09 | 8:52AM   Quicksilver's 3Q Production Lags
11-04-09 | 10:36AM   Quicksilver's Production Outstrips Estimates
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Analyst Notes
11-20-09 | 3:17PM   Chesapeake Energy under Review
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Analyst Notes
07-30-09 | 3:00PM   EQT Adds Projects in 2Q
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Analyst Notes
07-29-09 | 4:57PM   Questar's 2Q Stays on Track
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04-23-09 | 1:09PM   2009 NYC IPAA Conference Notes

More Analyst Research XTO Energy, Inc. Full Analyst Report


Analyst Notes
11-04-09 | 9:25AM   XTO Tops Our 3Q Production Forecast
08-05-09 | 9:11AM   XTO's 2Q Results Impress
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More Analyst Research Encore Acquisition Company Full Analyst Report


Analyst Notes
11-02-09 | 3:05PM   Denbury Faces Merger Challenges
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More Analyst Research Cabot Oil & Gas Corporation Full Analyst Report


Analyst Notes
10-27-09 | 4:17PM   Cabot Oil Ramps Up 2010 Drilling
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05-22-09 | 3:58PM   Lower Uncertainty for Cabot Oil

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Analyst Notes
08-07-09 | 2:35PM   Williams' Projects Progress in 2Q
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Analyst Notes
08-07-09 | 9:00AM   EOG Announces 2Q Results
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Analyst Notes
10-22-09 | 9:30AM   Cimarex Gives 3Q Operations Update
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Analyst Notes
11-12-09 | 9:18AM   EnCana Provides 2010 Estimates
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Analyst Notes
10-30-09 | 9:20AM   Ultra's 3Q Earnings Impress
08-04-09 | 9:19AM   Plenty to Like in Ultra's 2Q Earnings
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Analyst Notes
11-05-09 | 2:27PM   BG Group Reports 3Q
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Eric Chenoweth, CFA, is an associate director of stock analysis with Morningstar. Analyst Feedback.
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