Investors Focus on Natural Gas Cos, Betting on Recovery

MOSCOW (Dow Jones Newswires), May 28, 2009

Last year, investors rattled by falling oil and gas prices sought safe haven in the shares of major oil companies. But now that these commodities seem to have bottomed, the spotlight is shining on smaller companies with higher growth potential.

While shares of Exxon Mobil Corp. (XOM), Chevron Corp. (CVX) ConocoPhillips (COP), Royal Dutch Shell (RDSA) and BP PLC (BP) have lost an average of 21% since January, the stock of smaller firms such as Chesapeake Energy Corp. (CHK), Petrohawk Energy Corp. (HK) and Newfield Exploration Co. (NFX) is up an average of 21% in the same period.

The shift underscores investor sentiment that these companies, which have promising unconventional natural gas assets in the U.S. and aggressive growth plans, are better positioned to benefit from an expected rebound in natural gas prices than international oil firms. Oil majors are having trouble increasing output and have large refining operations that eat away gains from higher prices. Besides, most of their production is oil, a commodity also expected to recover in 2010, but proportionally less than natural gas.

"Major oil companies are good defensive stocks," said Rehan Rashid, an analyst at Friedman, Billing, Ramsey & Co. Inc. in Arlington, Va. "But the hope now is that as the market turns around and commodity prices stabilize, smaller companies like Petrohawk or Newfield are the ones that will become very profitable," he said.

But not all independent natural gas producers are set to take advantage of a possible price rebound. Companies that can't produce enough cash to meet debt obligations and are unable to access credit markets to fuel new drilling have grim expectations. Oklahoma City-based Crusader Energy Group Inc., for example, filed for bankruptcy protection in March.

For this reason, analysts prefer companies with low debt and viable growth plans. Petrohawk, for example, reported Tuesday that its first-quarter output rose 15% from the fourth quarter and analysts expect its production to grow about 40% in 2009.

Shale Gas Producers, The Winners

Last summer, when oil and natural gas prices fell from their all-time high of $147.50 a barrel and $13.69 a million British thermal units, respectively, investors found refuge in the stock of major oil companies with strong balance sheets, diversified operations and were seen as able to withstand the crisis.

 

Prices are still weak -- with oil trading at about $47 a barrel and natural gas sinking to $3.521 a million British thermal units -- close to a six and a half year low. But investors are increasingly convinced commodity prices will recover next year driven by improved economic conditions, stronger demand for energy and tighter supply.

Some analysts are especially optimistic about the recovery of the price of natural gas as they expect the effects of a major pull back on drilling activity to curb domestic output, pushing prices up and operating costs down. The number of rigs drilling for natural gas in the U.S. has fallen by about half, since reaching a peak last September of 1,606 rigs, according to data from oilfield services company Baker Hughes (BHI).

"Investors think for the most part that the downturn in natural gas prices is not a long-term phenomenon," said Michael Jacobs, vice president of exploration and production research at Tudor, Pickering, Holt & Co. Securities Inc. in Houston.

Domestic gas producers that learned how to tap natural gas trapped in rock formations known as shales and that have enough credit or cash to survive the current lower price environment are expected to benefit the most from the possible in surge prices.

But oil majors -- which have focused on expansion plans mainly on oil and gas from massive international fields, underestimating unconventional natural gas production in the U.S.-- are likely to miss part of possible rally, analysts said.

According to Fadel Gheit, an analyst with Oppenheimer & Co. Inc in New York, the end of investor flight toward the stock of oil majors occurred when oil prices hit $33 a barrel in February and started to rebound.

"Investors made a bet then that commodity prices were not going any lower and quickly shifted their focus mainly to natural gas companies," Gheit said.

Gheit last week downgraded the stock of major oil companies from outperform to perform.

Copyright (c) 2009 Dow Jones & Company, Inc.

Related Companies
 Company: BP plcmore info


 - BP Production to Grow with Thunder Horse South Expansion (Jan 23)
 - Big Oil Back On The Acquisition Trail As Outlook Brightens (Jan 19)
 - Canada Rules Out Arctic Oil Drilling Extensions for ExxonMobil, BP (Jan 6)
 Company: Exxon Mobil Corporationmore info


 - ExxonMobil's $5.6B Acquisition Validates Permian as Core Operator Strategy (Jan 17)
 - Petrovietnam, Exxon Mobil Sign Deal On Gas Generation (Jan 13)
 - ExxonMobil Strikes More Oil Offshore Guyana (Jan 12)
 Company: Newfield Exploration Companymore info
 - $2 Billion Gulfport Buy Shows Drillers Thirsting for Next Play (Dec 15)
 - Newfield CEO Sees Cautious Approach on Big Oklahoma Oil Find (Oct 17)
 - E&P Companies Target Potential of STACK, SCOOP Plays (Aug 25)
 Company: Shellmore info


 - Norway Awards 56 Oil And Gas Licences In Mature Areas (Jan 17)
 - Southern North Sea Special Interest Group Launched (Nov 21)
 - Report: Growing Confidence in North Sea Oil, Gas Industry (Nov 14)
 Company: ConocoPhillipsmore info


 - Startup Of Malikai Oil Field To Boost Malaysia's Kimanis Exports (Dec 13)
 - US Shale Firms Go Back To Work Buoyed By OPEC Deal, Trump Victory (Nov 14)
 - ConocoPhillips Aims To Sell Up To $8 Billion In Gas Assets (Nov 10)
 Company: Baker Hughesmore info
 - Baker Hughes: US Drillers Add The Most Oil Rigs Since April 2013 (Jan 20)
 - Baker Hughes: US Drillers Add Oil Rigs For 10th Week In A Row (Jan 6)
 - Baker Hughes: US Oil Rig Count Recovers To End 2016 Near Year-Ago Levels (Dec 30)
 Company: Chevron Corporationmore info
 - Argentina Clinches Deal to Attract Investment in Vaca Muerta Shale (Jan 11)
 - Oil, Gas Conflicts throughout Africa in 2016 (Jan 4)
 - SOCAR, AIOC Agree to Develop ACG Field (Dec 23)
 Company: Chesapeake Energy Corporationmore info
 - Chesapeake Earns Almost $1B from Two Haynesville Gas Asset Sales (Dec 20)
 - Chesapeake to Sell Haynesville Asset for $450M (Dec 5)
 - Chesapeake Energy Expects To Exit 2017, 2018 With Higher Output (Nov 3)
 Company: Petrohawk Energymore info
 - Ex-Petrohawk CEO to Head $550M Re-Capitalized Ram Energy (Dec 22)
 - BHP Billiton Completes Petrohawk Acquisition (Aug 26)
 - BHP Billiton-Petrohawk Deal Gets Final Nod (Aug 18)
Events  SUBSCRIBE TO OUR NEWSLETTER

Our Privacy Pledge
SUBSCRIBE


Most Popular Articles


From the Career Center
Jobs that may interest you
Sr District Account Manager
Expertise: Sales
Location: New Orleans, LA
 
Technical Service Representative-Service Engineer
Expertise: Sales
Location: Borger, TX
 
Project Engineer/Project Manager
Expertise: Project Management
Location: Baton Rouge, 
 
search for more jobs

Brent Crude Oil : $55.23/BBL 0.46%
Light Crude Oil : $52.75/BBL 0.62%
Natural Gas : $3.24/MMBtu 1.25%
Updated in last 24 hours