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S&P Equity Research Issues Energy & Materials Sector Predictions For 2011

Integrated oil and gas companies were late to arrive on the scene for onshore unconventional natural gas plays, and have started to make inroads via acquisition (ExxonMobil's [NYSE: XOM 75 *****] June 2010 acquisition of former independent XTO Energy for approximately $41 billion is a notable example). While ERS thinks natural gas remains a solid long-term play, short-term natural gas prospects continue to look weak given depressed prices, putting pressure on smaller players that lack access to the currently more promising liquids-rich plays. ERS thinks this will spur more natural gas acreage deals in a buyer's market We see the integrateds increasing production of natural gas by 10% in 2011, fueled by acquisitions, compared to just 1% growth in liquids production.

4. Energy MLPs will likely raise dividends.

ERS sees energy MLPs, which typically distribute a high proportion of their cash flows in the form of dividends, raising their distributions by an average of 5% in 2011. Our projected increase is based on our view of rising volumes and new projects placed into service. We see these MLPs benefiting from expectations for improved real gross domestic product growth in 2011 and continued low interest rates. One example is Sunoco Logistics Partners [NYSE: SXL 84 ****], which ERS sees growing its distribution by 6% to $4.90 per unit, which at current prices would imply a yield of about 5.8%, well above S&P's projected 3.2% yield for a U.S. 10-Year Treasury bond.

5. We believe China concerns will weigh on base metals.

For 2011, ERS looks for rising prices and volumes for base metals and minerals on our expectation for continued growth in the global economy and tight supply for such commodities as copper and iron ore. However, ERS's positive outlook is tempered somewhat by concerns that growing imbalances in China's property markets could lead to less vibrant demand for base metals used for construction. As ERS sees it, what appears to be excessive construction of both commercial and residential buildings along with high ratios of property prices to rents could lead to reduced demand and lower prices for base metals and minerals.

6. Demand for building products will improve in 2011, according to ERS, on a faster than expected housing recovery.

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