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Stock Strategist Industry Reports

E&P Outlook 2010

Gas and oil fundamentals are still at odds in 2010.

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The energy stock rally stalled out in the fourth quarter of 2009, with market valuations still resting very close to our fair value estimates in many cases. Fears that natural gas price weakness will extend into 2010 gained traction after third-quarter results were reported.

Still Waiting for a Gas Supply Contraction
We were surprised by the confidence emanating from E&P CEOs, suggesting healthier capital markets, higher activity levels, and greater drilling efficiency would lead to considerable production gains in 2010. If the industry is doing more with less, and spending and activity levels are on the rebound, when, if ever, will natural gas supplies contract? We, like many others, expected the dramatic reduction in the rig count would ultimately translate into lower output. However, we haven't yet seen a marked contraction in supply, nor have natural gas prices rebounded to a price that grants the industry an adequate return on capital, in our opinion. Yet many of the largest gas producers look prepared to ramp up production over the next year.

Eric Chenoweth has a position in the following securities mentioned above: CVX, XOM, RRC, RDS.A. Find out about Morningstar’s editorial policies.