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Americas: Energy: Oil & Gas - E&P: Houston
trip: Further rig drops likely; gas S-D
balance to improve
Industry context
In a trip to Houston earlier this week, we attended the Anadarko Petroleum analyst
meeting, met with managements of Apache, Noble Energy, Newfield Exploration, Cabot
Oil and Gas, Southwestern Energy and Ultra Petroleum, and met with selected oil service
companies.
Source of opportunity
We are reiterating our Attractive coverage view on E&P stocks following our meetings.
We came away with three key conclusions from our trip:  (1) E&P and oil service
managements expect further reductions in the rig count and are more bearish on the
outlook for natural gas prices into 2010; (2) temporary natural gas storage fixes are
beginning, most notably coal to gas substitution, voluntary gas production curtailments
and forced gas production curtailments; and (3) drilling and completion costs are likely to
fall further. While natural gas prices have moved lower than our expectations putting
potential downside risk to Street forecasts, we continue to expect improvements in the
natural gas supply-demand imbalance in the coming weeks that if recognized can be
positive catalysts for E&P stocks. We continue to believe that a resumption of drilling will
likely be needed in 2010 and that the Haynesville and Marcellus shales among other key
shale plays will represent baseload, not marginal gas drilling basins. We continue to prefer
companies exposed to these plays.
Catalyst
We believe weekly gas storage results versus expectations are the key near-term catalyst
as is any other indication of industrial/electricity demand or potential declines in gas
supply.
Risks
Commodity price volatility, drilling results, costs, gov’t pronouncements.
Best buy idea
EXCO Resources, Questar, XTO Energy, Chesapeake Energy, Newfield and Encore
Acquisition are Buy-rated.
Best sell idea
Anadarko, Pioneer Natural Resources, Suncor Energy and Bill Barrett are Sell rated.
The Goldman Sachs Group Inc. does and seeks to do business with companies covered in
its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment
decision.
March 13, 2009 Analyst Comment
2 Goldman Sachs Global Investment Research