When oil stocks jumped last week thanks to planned production cuts, shares of exploration-and-production firms geared to natural gas tagged along. But there's more to their ascension -- and their potential -- than natural gas' ties to oil.
The high rates at which natural-gas reservoirs drain, coupled with reduced spending on finding and tapping natural-gas wells, could produce as much as a 4% drop in the amount of natural gas produced domestically by the end of this year, some analysts say. At the same time, demand is expected to rise.
"The oil move was the first leg for the movement of some of these stocks," says Bob Christensen, an analyst at
in New York. "You have to ask yourself if there's another leg."
The supply-demand gap, which will be "plain as day" by 2000's first quarter, is good reason to buy natural-gas-geared stocks now, Christensen says. His "early-bird special" recommendation list includes large-cap exploration-and-production company
and natural-gas pipeline company
. He has buy ratings on Burlington and Coastal and an accumulate rating on Newfield. First Albany hasn't performed underwriting for the three.
Peter McNally, an analyst at Stamford, Conn.-based
Northstar Investment Management
, took advantage of stocks that had been beaten down so low about four weeks ago that he figured it was time to buy. His firm nibbled at "gassy" names with "lower debt, good management and low finding costs," like
Enron Oil & Gas
Ironically, rising oil prices will contribute to the increase in demand for natural gas. Crude prices are up about $3 per barrel from February lows, to $14.32 per barrel Tuesday. So some crude-oil products are now more expensive than natural gas, a big change from recent history. Since November 1997, when crude prices began to tumble, residual fuel-oil prices went down faster than natural-gas prices. This led larger customers, including utilities, to switch to the cheaper oil, eating away about 3% of the natural-gas market last year. With higher oil prices, Christensen sees those customers returning to natural gas this year, upping demand.
"We lost about 1.2 billion cubic feet per day of gas consumption in the latest period of oil-to-gas competition," he says. With the rise in oil prices, "maybe we're starting to win that back."
Further, industrial usage, which accounts for about 44% of total natural-gas consumption, may be on the rise if the manufacturing sector expands, as indicated by February's uptick in the
Purchasing Managers Index
. About 1% of natural-gas demand also disappeared last year during the
strike; small as it is, that demand should return this year, Christensen says.
On the supply side, the big question is what will happen to gas-production levels with so many spending cuts, says Carl Kirst, a natural-gas analyst at
in Houston. The consensus has shifted to simply wondering when -- rather than if -- lower spending levels by gas companies on drilling will affect production.
"The forecasts range from next month to next year," Kirst says.
It's easy to see why people expect less supply. The natural-gas rig count is near a four-year low. After averaging 565 in 1997 and 562 in 1998, the number of rigs drilling for natural gas has fallen to 420 recently, according to
, which tracks rig counts.
And even when the gas-rig count was at an all-time high, production barely budged, Kirst says. The flood of natural gas that was expected because of the increased numbers of rigs drilling never materialized.
"Soon enough, the lack of gas will be apparent," says McNally at Northstar Investment. He points to the wide spread in the 12-month natural-gas futures strip. Contracts for April natural-gas delivery settled at $1.71 per thousand cubic feet Tuesday, but contracts for December 1999 delivery jumped to $2.29. Historically there has been a very narrow spread, he says.
The higher prices on the far end of the futures strip -- the November and December contracts -- show how tight the Street thinks the natural-gas market will become, says Jefferies' Kirst.
One concern in recent weeks has been natural-gas storage levels, which have been above average because of the relatively warm weather. The supply overhang has kept pressure on prices, but analysts expect prices to rise heading into the third quarter, when lower supply is expected to collide with rising demand.
Salomon Smith Barney
oil exploration and production analyst Thomas Driscoll recently raised his natural-gas price forecast for the year 2000 to $2.75 from $2.35.