I've noticed a lot of articles recently on natural gas oversupply issues emerging in the US. Wonder what you guys think of it. Looks like STX should do OK even with lower prices but would seem to take away some of the upside IMO.
Oversupply of natural gas dulls luster of exploration and production companies By Anna Driver ReutersPublished: August 27, 2008
HOUSTON: Independent exploration and production companies have tantalizingly low valuations thanks to a commodity sell-off, but concerns about a supply glut of natural gas in the United States will likely limit near-term investor interest.
"I feel like I haven't seen sentiment this negative in quite a long time, and it is mostly because of supply issues," said Ray Deacon, senior analyst at Pritchard Capital Partners.
Double-digit production growth from companies like Chesapeake Energy and shale fields like the Haynesville in Louisiana, where gas is trapped in layers of rock, have raised concerns about oversupply.
Natural gas futures have fallen about 40 percent from the July peak near $13.70 per thousand British Thermal Units, a drop that has weighed on shares of independent oil and natural gas companies.
The American Stock Exchange index of natural gas producers, which includes companies like XTO Energy and Anadarko Petroleum, tumbled about 20 percent since the July peak as of the market close Monday. And those companies are trading at about five times 2009 cash flow, well below the 5.7 to 7 times cash flow the companies have traded in the last two or three years, analysts said.
Today in Business with Reuters Will the bailout work?Bush administration wants $700 billion for Wall Street bailoutThe odd couple behind the bailout Based on any measure, whether price to cash flow, price to earnings or price to net asset value, the sector's valuations are "very compelling but short-term risk is high," said Capital One Southcoast in a note to clients Friday. Low valuations often signal a bargain and draw interest in stocks, but uncertainty about onshore supply and the direction of natural gas prices has kept some out of the market.
Investors looking at exploration and production stocks are faced with a difficult combination, Bernstein Research said in a note to clients.
"On the one hand, exploration and production valuations are lower than they have been in over two years," the company wrote. "On the other hand, however, we believe that consensus expectations are overly optimistic, especially for 2009, and that negative revisions are pending."
Wall Street consensus estimates for earnings and cash flow estimates for 2009, Bernstein noted, make the assumption that oil and gas prices will continue to rise, "a situation we find unlikely."
Still, Bernstein said Newfield Exploration and XTO Energy are among the exploration and production companies that are likely to see earnings and cash flow grow in 2009.
Investors' confidence in exploration and production companies may be restored if energy companies start using their cash to buy back stock rather than expanding their drilling programs, said Deacon of Pritchard Capital.
"In general, investors would like to see the industry be less aggressive," said Deacon.
On Monday, Anadarko announced it had authorized the repurchase of $5 billion of its shares, or 18 percent of the outstanding stock.
The pop in natural gas prices earlier this year sparked renewed interest in drilling in North America, a market that suffered a slowdown last year. Higher prices, coupled with intense interest in shale projects, spurred many companies to increase their drilling budgets for 2008. And shortages of pipeline and processing equipment in basins like the Barnett and Haynesville shales will likely curtail supply, Deacon said.
Some analysts, while they remain cautious, said natural gas prices might not fall much further.
"I think we are starting to see natural gas form a bottom, which may be an opportunity to step back in," said Jeb Armstrong, energy analyst with Calyon Securities.
In this uncertain time, Armstrong said, Calyon recommends stocks with large acreage positions and lower finding and development costs like Chesapeake and Range Resources.
Ted Parrish, a portfolio manager at the Henssler Equity Fund, which owns about 200,000 shares of the oil and gas company Apache, said there was no reason why he would not buy the company at its current valuation.
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