Long term, Global Hunter likes the natural gas sector, and said prices may rebound sooner than believed by most. Top picks in the sector by Hunter include Brigham Exploration (Nasdaq:BEXP), Carrizo Oil & Gas (Nasdaq:CRZO), GeoResources (Nasdaq:GEOI), Harvest Natural Resources (NYSE:HNR), Plains Exploration (NYSE:PXP), Venoco Inc. (NYSE:VQ) and Ultra Petroleum (NYSE:UPL).
"We are not 'throwing out the baby with the bath water' although we are reducing our natural gas price forecast. We are doing this to be conservative to the strip as we like to “sell the downside” and revise estimates up. In fact, for the first time since 1Q10, we are becoming more optimistic about natural gas prices in the future. It is our opinion that oil may be the best thing to happen to natural gas since the Natural Gas Wellhead Decontrol Act of 1989 was inked that deregulated natural gas prices. By this, we mean that the technology that generated an overabundance of natural gas is now migrating to potentially better economic unconventional oil reservoirs. Given the relative value per MMBtu, we believe it will be likely difficult for human, financial, and oilfield service assets to migrate back to natural gas drilling if these oily projects are economically viable. In other words, the mechanism for bursting the new gas bubble may now be in place as long as a disparity exists between U.S. natural gas prices and global crude prices. And, much like the early 1990s, it is not likely to be a one or two quarter fix. However, natural gas price recovery could occur in 2H11 if operators curb natural gas spending and there remains an increasing focus on liquids rich projects," said Global.
"We are adjusting our 2010 oil and gas prices from $77.32 to $77.84 per barrel and from $4.66 to $4.41 per Mcf, respectively. We are also altering our 2011 oil and gas prices from $79.77 to $81.10 per barrel and $5.34 to $4.35 per Mcf, respectively. Further, although we are maintaining our $80 long term oil price deck, we are reducing our long term natural gas price deck to $5.50 from $6.00 per Mcf given the forward curve of natural gas and our forecast, that under the current cost structure of the industry, natural gas needs to be between $5.50 and $6.00 in order to keep the market balanced."
Companies Global Hunter said they're maintaining "Buy" ratings on, which incude some of their top picks above, are Berry Petroleum (NYSE:BRY), Brigham Exploration, Callon Petroleum (NYSE:CPE), Carrizo Oil & Gas, Clayton Williams Energy (Nasdaq:CWEI), Comstock Resources (NYSE:CRK), Endeavour International (NYSE:END), GeoResources, Harvest Natural Resources, PDC Energy (Nasdaq:PETD), PetroQuest Energy (NYSE:PQ), Plains Exploration & Production, Venoco Inc., Whiting Petroleum (NYSE:WLL), and Ultra Petroleum.
Natural gas companies ratings downgraded by Global are Chesapeake Energy (NYSE:CHK), Continental Resources (NYSE:CLR), Crimson Exploration (Nasdaq:CXPO), Range Resources (NYSE:RRC), Rosetta Resources (Nasdaq:ROSE), Southwestern Energy (NYSE:SWN), and TransAtlantic Petroleum (NYSE:TAT). All of them were cut from "Buy" to "Accumulate."
There is no doubt natural gas companies could be among the best buys at this time, being out of favor because of the extraordinary amount of supply, but this is definitely a buying opportunity for those doing their homework and investing in solid companies at great prices.
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