E&P stocks keep pace with broader market performances

By OGJ editors

HOUSTON, Aug. 8 — Stock values of publicly traded exploration and production companies on average kept pace with the securities market overall as perceptions of an "inevitable" US attack on Iraq pushed up oil prices last week, said Robert Morris at Salomon Smith Barney Inc. in New York.

In fact, Morris this week reported a composite of E&P companies of various sizes has outperformed the broader markets so far this year, due largely to the rise in oil and gas prices.

In that study, Salomon Smith Barney officials classify large E&P companies as those with market capitalization in excess of $3 billion. Medium E&P firms are those with market capitalization of $>1-3 billion, while small E&Ps are those capitalized at $>200 million-1 billion, and micro E&Ps have market caps of $200 million or less
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While the near-term prospects for lower commodity prices "remain a concern," Morris reported last week, "the longer-term risk-reward profile for E&P shares is quite attractive at this juncture."

He said, "The upside to our 12-18-month price targets for our coverage group, on average, is now over 35%, while the downside, excluding a post-Sept. 11 scenario or an unexpected collapse in oil prices, is not much more than 15%." That's based on assumed spot prices of $20/bbl for West Texas Intermediate crude and $3.50/Mcf for natural gas.

"The greater concern near-term along the commodity price front is with natural gas prices, given that storage levels appear on course to exceed last year's mark at the start of November," Morris said. "However, we do not believe that the near-term downside for composite spot natural gas prices is the $1.73/MMbtu reached last year during September. Instead, we think the downside risk near term is just under $2.50/MMbtu, apart from a sharp drop in oil prices."

Rather than allowing gas prices to fall to the lower levels of last year, he said, E&P companies would begin curtailing North American gas production at a price of $2.50/MMbtu this year. Moreover, Morris said, "Several interesting operating trends emerged from the second quarter results for independents. While overall results were generally better than expected, a much more active second half (of this) year is expected, particularly along the exploration front."

He said, "One third of the companies in our coverage group that have so far reported have announced an increase in full-year spending plans and, despite the recent pull-back in stock prices, share repurchases do not seem to be on the agenda."

Morris noted, "After being nearly flat sequentially in the second quarter, domestic natural gas production appears to have turned the corner for most of our coverage group, although the integrateds continue to come up short of offsetting natural gas declines in North America."

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