Emerging Shale Plays Alter Landscape

- Natural Gas Price Outlook — "We are revising our 2010 composite spot natural gas price forecast to $4.50/MMBtu from $4.75/MMBtu. Although a cold start to the year and a record-hot summer helped to tighten the supply/demand balance, continued rig efficiency improvements and a strong pace of capital outlays has driven domestic production to higher levels than originally forecast. For 2011, and assuming normal weather, we are revising our forecast to $4.25/MMBtu from $5.75/MMBtu. Even though we are assuming a 15% drop in the domestic gas rig count by the end of next year, with difficult yr/yr weather comps, the supply/demand balance appears looser than this year. We are reducing our “normalized” price to $5.50/MMBtu from $6.25/MMBtu because we believe that significant running room still lies ahead in numerous North American shale plays, providing acceptable returns at $5.50/MMBtu and yielding ample supply to meet demand for at least several years ahead."
- Glimmer of Hope in 2012? — "Given our current projections, 2012 provides perhaps the first glimmer of hope wherein total U.S. natural gas production peaks in the third quarter of next year at the same time that drilling to hold acreage begins to abate. Hence, our $5.50/MMBtu forecast beginning in 2012 and going forward."
- Longer-Term Oil Price Outlook Unchanged — "We are lowering our 2010 WTI spot oil price forecast to $78.20/Bbl from $81.00/Bbl. Our 2011 and normalized price forecasts remain $85.00/Bbl and $80.00/Bbl, respectively."
- Adjusting estimates and price targets — "Based on our revised commodity price outlook, we have adjusted earnings, net asset value and price targets for our coverage group. On average, we have lowered 2010 EPS/CFPS estimates by 11%/4%, for 2011 by 27%/18% and for 2012 by 13%/26%. Proven reserve NAV estimates have dropped, on average, by 10% while price targets, on average, are now 7% lower."
- Continue to Prefer Oil-Leveraged Names — "Overall, we continue to have a greater proclivity for the more oil-leveraged names. Our top picks are APC and APA."


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