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Natural Gas Prices Heading For Further Drop: Sterne Agee

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An April 23rd Industry Report from Sterne Agee takes a closer look exploration and production companies in the O&G industry. SA analysts Tim Rezvan and Truman Hobbs break down current developments in the O&G sector and revise their estimates on firms in their coverage universe and for oil and gas prices in 2015 and 2016.

Only minor changes to oil price estimates

Rezvan and Hobbs note that they are reducing their WTI crude outlook for 2015 to $54/b from $58/b, while marking-to-market first quarter 2015 WTI/Brent prices to $48.57/b and $55.13/b. Their Brent crude estimates are not changed for 2015/16 and WTI estimates remain unchanged in 2016. The SA analysts recommend Energen and QEP Resources.

Energen (EGN — $74 PT)

The analysts explain their recommendation of Energen. “Despite a pristine balance sheet (0.7x net debt/TTM EBITDA at y/e 2014, estimated to trend to 1.6x at y/e 2015), a competitive Midland Basin footprint and intriguing near-term catalysts, Energen remains a sharply undervalued name, relative to other Permian pure-plays. We expect this disparity between Energen (9.1x 2015E EV/EBITDA), Pioneer Natural Resources (14.1x) and Diamondback (13.8x) to narrow in 2015.”

Natural gas prices likely to slip in second half

Oil Price, Natural Gas Price

The report also suggests that SA’s current $2.72/mcf 2015 gas estimate may be too optimistic.

Rezvan and Hobbs highlight that dry gas production data suggests the U.S. will see around 5-6 Bcf/d y/y growth. This means it is likely the current small deficit of gas in storage will reverse shortly. They “expect a combination of weak spot pricing and a growing glut of storage to weigh on the commodity in ’15. Street consensus of $3.13/mcf remains too high. We favor operators with solid balance sheets and break-evens below $2.50/mcf.”

Unless it is an extremely hot summer, very high gas in storage is likely to accumulate during the summer months, which will hold gas prices down. Recent downgrades (Chesapeake Energy to Underperform from Neutral, Southwestern Energy to Neutral from Buy) are based on this thesis. Gulfport Energy is their top gas pick.

Gulfport Energy (GPOR)

The SA report notes that excellent production of 424 mmcfe/d was pre-announced by Gulfport last week, making full-year production guidance of ~456 mmcfe/d well within reach. Even with weak natural gas prices this summer, Gulfport’s robust hedge portfolio (60% of 2015E natural gas production hedged at $4.03/mcf) and anchor tenant status at the Cadiz processing complex gives the firm strong pricing options for natural gas and NGL production.
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