Reduce 2009, 2010 and Long-Term Gas
Outlook; Downgrade CHK, DVN, Upgrade NFX
■
Reduce Near and Long-term NYMEX Natural Gas Outlook. Our 2009
forecast is lowered to $4.09 per MMBtu (from $4.37), while 2010 falls to
$5.75 per MMBtu (from $6.50) vs. the $6.65 Street outlook. Also, we are
reducing our long-term outlook to $7.00 per MMBtu (from $8.00), which we
detail in our note out this morning, “Natural Gas: Lower Long-Term Gas
Price to $7 (from $8); Efficiencies Pressuring U.S. Cost Curve”. Our oil price
outlook remains $60 per Bbl for 2010 and $70 per Bbl for the long-term.
■
Outlook Soft for Remainder of 2009. We expect markets to stay fairly soft
for the remainder of 2009 due to (1) record October-end storage levels (~3.8
Tcf) (2) the potential for near-term reversal of gas displacement of coal (~2-3
Bcf/d) as switching economics have recently flipped in coal’s favor and (3) a
persisting underlying supply/demand imbalance currently masked by
prevailing shut-ins, Boardwalk pipeline downtime and Independence Hub
maintenance.
■
Lower 2010 Outlook to $5.75 (from $6.50) on Slower Supply Response.
We now see the widely-anticipated gas market retightening as being delayed
by (1) much more muted production declines and (2) the potential for gasfired
power demand weakness. On the supply side, total U.S. output is down
only 1.6% (1.0 Bcf/d) from a February’09 peak. Moreover, we see an
industry that has the desire, near-term liquidity and capital market access to
pursue volume growth. With a rising gas rig count (up 7% from July trough)
and improved well results, our rig productivity model now shows peak to
trough U.S. onshore supply declines of just 3.2 Bcf/d (from Nov’08 peak),
well-below the 5 to 7 Bcf/d that many industry players reference in their
bullish 2010 gas outlooks.
■
Downgrading CHK and DVN; Upgrade NFX. Despite weak gas prices and
obvious concerns about the pace of output declines, gas-focused E&P
shares have been strong performers, now up 27% YTD (vs. 11% for S&P
500) and up 66% from the March trough (vs. 49% for the S&P 500). With
ample risk to a supply-driven reset and overall shares discounting ~$7.25-
$7.50 gas, we would exercise caution on lightly hedged gas producers with
risk to growth. As such, we are downgrading CHK to Underperform (TP of
$24), and DVN to Underperform (TP of $59). We remain at Underperform on
EOG which trades well above NAV and has few hedges. We are also
upgrading NFX to Outperform (TP of $48) as we see significant relative
value given its reasonable valuation, improving asset quality and solid
hedges (72% of 2010 gas production). We retain favorable views of APA,
NBL, WLL, APC and EQT.