Simmons: E&P stock gains not sustainable

March 27, 2002
The recent uptick in US exploration and production company stocks will prove short-lived, contends an analyst with Houston investment banker Simmons & Co. International. Charles Eades, vice-president, Simmons E&P equity research, said that the likelihood of a slump in natural gas prices in the coming months means that the recent E&P stock gains are not sustainable.


By OGJ Editors
HOUSTON, Mar. 27 -- The recent uptick in US exploration and production company stocks will prove short-lived, contends an analyst with Houston investment banker Simmons & Co. International.

In a recent research report, Charles Eades, vice-president, Simmons E&P equity research, said that the likelihood of a slump in natural gas prices in the coming months means that the recent E&P stock gains are not sustainable.

The group of 10 large E&P independents that the tracks is currently discounting a normalized natural gas price of $2.90/Mcf, Eades estimated.
"In our view, a cheaper entry point into the [E&P company] sector will present itself over the next 6 months," he said.

Eades expects that gas prices are likely to break below $2/Mcf during the third quarter before rebounding later in the year and into 2003, adding, "We believe there is 27% near-term downside risk in the [E&P company] sector [stocks].
"Thus the current risk-reward ratio for the E&P group is not compelling."

He cited as factors for the price softness a continuing gas storage overhang in the first half and only a modest decline in gas well deliverability this year. These factors underpin a price projection of $2.25/Mcf for the full year, $2/Mcf in the third quarter, and $2.50/Mcf in the fourth quarter.