Oil Stocks With Appealing Gas Assets
by: The Energy Report August 11, 2010
http://seekingalpha.com/article/219984-oil-stocks-with-appealing-gas-assets
Blue Phoenix Inc.'s Chief Commodity Strategist John Licata says BP's Deepwater Horizon accident in the Gulf of Mexico has already resulted in oily names acquiring gas names. It will soon result in more joint ventures as companies try to mitigate the risk of deepwater drilling. In this exclusive interview with The Energy Report, John tells us why he's bullish on natural gas and why he sees more M&A activity ahead. He also offers some E&P and services names that could ultimately benefit from the rapidly morphing oil and gas landscape.
The Energy Report: Just before our interview you were talking about how the BP spill had fundamentally changed the energy sector. Could you talk about some of those changes?
TER: Do you have any specific companies in mind when you talk about takeover targets?
JL: I think SM, a company I mentioned earlier, is a very interesting name. They're in the Eagle Ford Shale, which is very attractive, and they have a partnership with Anadarko, which could be increased. The natural gas liquids (NGLs) from the Eagle Ford are very attractive. I have spoken with management, and it seems like they're more willing to beef up their presence in the region. I think that makes them a little more of a target for a larger player, especially given their exposure to the Granite Wash Shale.
TER: You said the changing landscape was creating opportunities. Can you point to some specific ones?
JL: As you know, for the last two years natural gas prices have been very suppressed, and I think that has caused a lot of opportunities because many natural gas companies had to delay projects. That has caused the price of futures to be contained, but to the point where I think we're seeing some of that overcapacity start to reverse. Because natural gas has been cheap for a while, many of the coal-powered generation plants are looking to switch from coal to cheaper natural gas. The industry as a whole, which has been out of favor, is starting to get a little more attention. There's still a fear factor with natural gas, and that fear factor has been amplified by increased storm activity in the Gulf of Mexico. Even today, we were talking about another tropical storm that could possibly hit the region. So, natural gas, in my opinion, is a phenomenal play.
Many of the oil companies are going to look at these gas names and try to get involved in M&A. Some of the market caps of these natural gas companies have been hit hard over the last 18–24 months, and there are opportunities out there. It's cheaper to buy capacity than to create capacity.
TER: Are there some other names you like in the Eagle Ford and Granite Wash—plays other than SM?
JL: Forest Oil Corporation (NYSE:FST) is an interesting name. That's one I've followed for a long time. The company's based in Denver, but they are very big in the Granite Wash area, especially the northern Texas Panhandle. The company has really been trying to focus on organic growth, and it's a company that I think is a takeover target. Their location is now a sexier area that is gaining enthusiasm. When you look at that Granite Wash or even Eagle Ford Shale, those two areas are becoming much more of a hot commodity because they tend to have more NGLs on a percentage basis that can be sold back into the market. People are going to take advantage of those economics. Whether you're looking at the Eagle Ford or the Granite Wash, I think you can't have a natural gas portfolio that's not exposed to either.
TER: Do you have some price projections for gas through 2011?
JL: I haven't yet released my forecast for 2011, but I have an aggressive target of about $5.50 on natural gas for the end of this year. It's actually starting to get more into my range if you look at the back months trading on the NYMEX. I think that's very credible. As for next year, I think that's going to be very dependent on—and this relates to oil, too—the recovery of the employment picture not only in the United States but also abroad. I would like to better assess the landscape here at the end of the year before I start making definitive calls for 2011.
TER: Alright, what about oil?
JL: Yes, it's the same for oil. In January, I wrote a report that said oil was going to hit $87. Well, we hit $87, and we have come off since. Unless we get a really positive turn in the employment picture in this country or we have a storm that knocks out production, I think we've seen the highs in crude oil for this year.
don't think oil prices can be sustained above $90 this year. It doesn't seem credible, but for 2011, I would not be surprised if we see triple digits in crude oil again.
TER: Any final thoughts on the oil and gas sector?
JL: The companies involved in the cleaner side of the energy landscape are going to do very well moving forward. Natural gas historically trades at a discount to oil of between of 10–12 times; right now we're about 19 times below. That gap is going to narrow with natural gas prices moving higher. I think that prices could be comfortably higher a year from now.
And most people are not focusing on the congressional elections in November, but it's my belief that many of those races will be determined on stances related to cleaner energy.
by: The Energy Report August 11, 2010
http://seekingalpha.com/article/219984-oil-stocks-with-appealing-gas-assets
Blue Phoenix Inc.'s Chief Commodity Strategist John Licata says BP's Deepwater Horizon accident in the Gulf of Mexico has already resulted in oily names acquiring gas names. It will soon result in more joint ventures as companies try to mitigate the risk of deepwater drilling. In this exclusive interview with The Energy Report, John tells us why he's bullish on natural gas and why he sees more M&A activity ahead. He also offers some E&P and services names that could ultimately benefit from the rapidly morphing oil and gas landscape.
The Energy Report: Just before our interview you were talking about how the BP spill had fundamentally changed the energy sector. Could you talk about some of those changes?
TER: Do you have any specific companies in mind when you talk about takeover targets?
JL: I think SM, a company I mentioned earlier, is a very interesting name. They're in the Eagle Ford Shale, which is very attractive, and they have a partnership with Anadarko, which could be increased. The natural gas liquids (NGLs) from the Eagle Ford are very attractive. I have spoken with management, and it seems like they're more willing to beef up their presence in the region. I think that makes them a little more of a target for a larger player, especially given their exposure to the Granite Wash Shale.
TER: You said the changing landscape was creating opportunities. Can you point to some specific ones?
JL: As you know, for the last two years natural gas prices have been very suppressed, and I think that has caused a lot of opportunities because many natural gas companies had to delay projects. That has caused the price of futures to be contained, but to the point where I think we're seeing some of that overcapacity start to reverse. Because natural gas has been cheap for a while, many of the coal-powered generation plants are looking to switch from coal to cheaper natural gas. The industry as a whole, which has been out of favor, is starting to get a little more attention. There's still a fear factor with natural gas, and that fear factor has been amplified by increased storm activity in the Gulf of Mexico. Even today, we were talking about another tropical storm that could possibly hit the region. So, natural gas, in my opinion, is a phenomenal play.
Many of the oil companies are going to look at these gas names and try to get involved in M&A. Some of the market caps of these natural gas companies have been hit hard over the last 18–24 months, and there are opportunities out there. It's cheaper to buy capacity than to create capacity.
TER: Are there some other names you like in the Eagle Ford and Granite Wash—plays other than SM?
JL: Forest Oil Corporation (NYSE:FST) is an interesting name. That's one I've followed for a long time. The company's based in Denver, but they are very big in the Granite Wash area, especially the northern Texas Panhandle. The company has really been trying to focus on organic growth, and it's a company that I think is a takeover target. Their location is now a sexier area that is gaining enthusiasm. When you look at that Granite Wash or even Eagle Ford Shale, those two areas are becoming much more of a hot commodity because they tend to have more NGLs on a percentage basis that can be sold back into the market. People are going to take advantage of those economics. Whether you're looking at the Eagle Ford or the Granite Wash, I think you can't have a natural gas portfolio that's not exposed to either.
TER: Do you have some price projections for gas through 2011?
JL: I haven't yet released my forecast for 2011, but I have an aggressive target of about $5.50 on natural gas for the end of this year. It's actually starting to get more into my range if you look at the back months trading on the NYMEX. I think that's very credible. As for next year, I think that's going to be very dependent on—and this relates to oil, too—the recovery of the employment picture not only in the United States but also abroad. I would like to better assess the landscape here at the end of the year before I start making definitive calls for 2011.
TER: Alright, what about oil?
JL: Yes, it's the same for oil. In January, I wrote a report that said oil was going to hit $87. Well, we hit $87, and we have come off since. Unless we get a really positive turn in the employment picture in this country or we have a storm that knocks out production, I think we've seen the highs in crude oil for this year.
don't think oil prices can be sustained above $90 this year. It doesn't seem credible, but for 2011, I would not be surprised if we see triple digits in crude oil again.
TER: Any final thoughts on the oil and gas sector?
JL: The companies involved in the cleaner side of the energy landscape are going to do very well moving forward. Natural gas historically trades at a discount to oil of between of 10–12 times; right now we're about 19 times below. That gap is going to narrow with natural gas prices moving higher. I think that prices could be comfortably higher a year from now.
And most people are not focusing on the congressional elections in November, but it's my belief that many of those races will be determined on stances related to cleaner energy.
