Engineering News

Natgas shares seen strong despite falling gas price
Sun Jan 8, 2006 11:33 AM ET

NEW YORK, Jan 8 (Reuters) - Warm weather and recovering production after a rough hurricane season are dragging down natural gas prices from last month's peak, but investors in gas producers are holding their positions on the belief that prices will remain at current historically high levels.

Since hitting a record peak of $15.78 per million British thermal units (mmBtu) on Dec. 13, the price of natural gas has fallen nearly 37 percent.

Yet in the same period the AMEX Natural Gas Index -- made up of some of North America's top gas producers such as Williams Cos , Apache Corp. and El Paso Corp. -- has fallen just 2.4 percent.

In fact, over the last year every member of that index but one is up at least 10 percent, and seven of the 15 members are up more than 50 percent.

Investors say that the decline in natural gas prices is mostly immaterial because the price is still high -- the fuel traded between $2 and $6 from 2000 through the start of 2005. And no one was building long-term valuation models for natural gas companies on prices in the $12-to-15 range.

"The fact that the price has fallen back below $10, I don't think has a long-term impact on the fundamental valuation of the companies," said Ben Halliburton, chief investment officer of Tradition Capital Management. Halliburton said he sees gas prices in the $8-to-$10 range through the end of the decade.

"I think if prices start to get back down to $7 or so people would begin to question their longer-term thesis for natural gas and you would see some pullback in the stocks," he said.

Even with the declines in the price of gas, it is still seen as an attractive investment for companies looking to expand their production, which has also helped to support valuations of late.

When ConocoPhillips agreed to buy Burlington Resources Inc. for more than $30 billion last month just as gas hit record highs, Conoco executives said the deal was still attractive at $7 or $8 per mmBtu and was economical even at $5 per mmBtu. Speculation on other potential gas targets boosted the entire sector for a time after the deal.

Rick Jones, portfolio manager of the BB&T Large Company Value Fund, said the Conoco-Burlington deal may have increased some investors' expectations of valuations for other companies in the sector and given the stocks a floor.

CRUDE LENDING STRENGTH

Surging prices for crude oil, even as gas has weakened, is also providing support to the natural gas shares, some investors say.

"As long as one of the commodities is in relatively short supply then they can serve as sort of an umbrella to each other," said Bill Gerlach, portfolio manager of the Gartmore Global Natural Resources Fund. "I'm not sure energy investors really differentiate between (oil and gas)."

The biggest danger to the strength in gas shares at this point, Gerlach suggested, would be warm weather. Last week, the Energy Information Administration reported a surprise addition to natural gas storage inventories for the most recent week, where some kind of withdrawal would have been expected.

"If we have warm weather through the end of January you'd think something would have to give," he said.

But over the long term, even if it warms up this winter, investors say gas will stay higher than it has been historically, and that will be enough to keep gas-producing companies attractive.

"I think the trend is going to be higher than what it has been over the last three years or so and that will give some support to the stocks," BB&T's Jones said.

Source: Reuters

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