Natural-Gas Price Projection Raised

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.