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June 4, 2009 Americas: Energy: Oil & Gas - E&PGoldman Sachs Global Investment Research 1
 
June 4, 2009
Americas: Energy: Oil & Gas - E&P
The new oil upcycle: Raising targets; BRY to Buy, STR to Neutral
Maintain Attractive coverage view on E&P stocks
We continue to gain confidence that the trough in the oil cycle has passedand a new up-turn is underway. We are raising our 2009-11 oil forecastsand lowering our 2009 natural gas price forecast. We continue to have anAttractive coverage view on E&Ps and see additional upside for oilier-focused stocks. We upgrade Berry Petroleum to Buy from Neutral andlower Questar to Neutral from Buy.
Structurally challenged oil supply to push prices higher
Our more positive crude view is based on stabilizing demand and fallingsupply. We believe stabilizing demand will reduce OPEC spare capacity,and we continue to see structurally challenged oil supply leading prices tosufficiently high levels to again ration demand as occurred in 2008. Wenow assume $80/bbl oil in 2010.
Lowering 2009 natural gas price, but nearing bullish inflection
We lower our estimated 2H2009 natural gas price $0.50/MMBtu to reflectrecent higher storage builds that lengthens the period until an increasedrig count will be needed. However, we see an inflection this summer vs 5-year trends as gas storage moves from build to draw that should lead torising prices. We believe natural gas prices of at least $5.50/MMBtu areneeded to stimulate drilling. Our 2010-13 gas price views are unchanged.
28% upside to revised targets, reflecting mid-cycle oil price
We believe stocks can reflect mid-cycle oil prices, and as a result we areraising our target prices and changing estimates. We see 28% upside torevised targets for E&Ps. Our favorites for pure oil exposure are PioneerNatural Resources and Berry Petroleum, where we see 42% upside onaverage, which still would represent discounts to historical valuations.Overall, Devon Energy remains our top pick due to exposure to theCanadian oil sands, deepwater oil developments in the Gulf of Mexico andBrazil, and shale gas exposure in the Haynesville, Barnett and Woodford.
BRY now Buy: Oil exposure, improving balance sheet, valuation
Our upgrade of Berry reflects Berry’s exposure to oil prices, upside fromthe Diatomite play and potential consolidation in California, lowerproduction costs due to low natural gas prices and attractive valuation. Wesee peer average upside for Questar, now rated Neutral.
RELATED RESEARCH
Global: Energy: Oil: “Recovery and relapse: Bullish oilequities at beginning of new upcycle,” Arjun Murti andteam, June 4, 2009Americas: Energy: ‘‘E&P/Coal: Stocks remain attractivedespite higher gas storage builds,” Brian Singer, AndreBenjamin and team, May 27, 2009Americas: Energy: ‘‘E&P/Coal: Still upside for shale growth,coal and oil price recovery,” Brian Singer, Andre Benjaminand team, May 11, 2009Americas: Energy: Coal: ‘‘Upgrade to Attractive: Inventoriesto fall, China GDP/US gas to rise,” Brian Singer, AndreBenjamin and team, May 04, 2009Americas: Energy: “Bullish China, Bullish CommodityEquities,” Arjun N. Murti and team, May 04, 2009.Americas: Energy: Coal: ‘‘Fundamentals remain weak,though further catch-up trade possible,” Brian Singer,Andre Benjamin and team, April 28, 2009Americas: Energy: Oil & Gas -E&P: ‘‘Improving natural gasS-D a catalyst even with rangebound prices,” Brian Singerand team, March 26, 2009Americas: Energy: Oil & Gas - E&P: ‘‘Tactically upgradingE&Ps to Attractive: Gas (im)balance at nadir,’’ Brian Singerand team, February 08, 2009Americas: Energy: Oil & Gas - E&P: ‘‘Natural gas: N-Tdownside, 2Q2009 bottom; prefer well-hedged inHaynesville/Marcellus, ‘‘Brian Singer and team, December11, 2008.
Brian Singer, CFA
(212) 902-8259 | brian.singer@gs.com Goldman, Sachs & Co.
Andre Benjamin
(212) 855-0470 | andre.benjamin@gs.com Goldman, Sachs & Co.
Pavan Hoskote
(212) 934-9934 | pavan.hoskote@gs.com Goldman Sachs India SPL
Uma Maheswari Yanamandra
(212) 934-1334 | uma.maheswari@gs.com Goldman, Sachs & Co.
The Goldman Sachs Group, Inc. does and seeks to do business withcompanies covered in its research reports. As a result, investors shouldbe aware that the firm may have a conflict of interest that could affectthe objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision. Customers inthe US can receive independent, third-party research on companiescovered in this report, at no cost to them, where such research isavailable. Customers can access this independent research atwww.independentresearch.gs.com or call 1-866-727-7000. For Reg ACcertification, see the end of the text. Other important disclosures followthe Reg AC certification, or go to www.gs.com/research/hedge.html.Analysts employed by non-US affiliates are not registered/qualified asresearch analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc. Global Investment Research
 
June 4, 2009 Americas: Energy: Oil & Gas - E&PGoldman Sachs Global Investment Research 2
The prices in the body of this report are based on the market close of June 3, 2009.
 
The new oil upcycle: Raising targets; BRY now Buy, STR Neutral
We continue to hold an Attractive coverage view on E&P stocks and see 28% averageupside to revised target prices. We are raising our oil price forecast to $59/bbl in 2009,$80/bbl in 2010 and $100/bbl in 2011 and have greater confidence in a new upcyclebased on stabilizing demand and secularly lower non-OPEC supply. We are reducingour 2H2009 natural gas price forecast to $4.50/MMBtu to reflect high gas storagelevels that likely can withstand for longer than expected a low rig count. Oil andshale gas exposure remain our key stock picking themes. Devon Energy remains ourtop pick among E&Ps. We are upgrading Berry Petroleum to Buy from Neutral andreducing Questar to Neutral from Buy.
Exhibit 1:
 
Raising 2009-11 WTI oil forecast, lowering 2009 Henry Hub natural gas forecast
Oil in $/bbl; natural gas in $/MMBtu
 
newoldnewold
1Q 2009E $43 $43 $4.75 $4.752Q 2009E $58 $47 $3.75 $4.253Q 2009E $65 $50 $4.00 $4.504Q 2009E $70 $60 $5.00 $5.50
FY 2009E
$59 $50 $4.38 $4.75
2010E
$80 $70 $6.50 $6.50
2011E
$100 $90 $7.50 $7.50
2012E
$105 $105 $7.00 $7.00
2013N
$85 $85 $7.00 $7.00
WTI oilHenry Hub natural gas
 
Source: Goldman Sachs Research estimates.
Exhibit 2:
 
Natural gas forecasts near strip price levels
Our Henry Hub natural gas estimates vs. strip, $/MMBtu
 Exhibit 3:
 
Oil forecasts higher versus strip
Our WTI oil estimates versus strip, $/bbl
 
$0$1$2$3$4$5$6$7$82H 2009FY 2010FY 2011FY 2012
   H  e  n  r  y   H  u   b  n  a   t  u  r  a   l  g  a  s  p  r   i  c  e
Strip priceOur estimate
 
$0$20$40$60$80$100$1202H 2009FY 2010FY 2011FY 2012
   W   T   I  o   i   l  p  r   i  c  e
Strip priceOur estimate
Source: Factset, Goldman Sachs Research estimates Source: Factset, Goldman Sachs Research estimates 
 
June 4, 2009 Americas: Energy: Oil & Gas - E&PGoldman Sachs Global Investment Research 3
Natural gas: High storage levels through 1Q 2010, though bullishinflection point this summer
Low gas storage levels are less likely through 1Q2010 without weather,hurricane help; reducing 2009 gas price forecast.
We do not believe absolute naturalgas storage levels will be at levels considered low or below normal through 1Q2010barring a warm summer, cold winter, and/or hurricane disruptions. As such, we do notbelieve we will need to stimulate a wave of new rig activity until we move closer toyearend. We expect we will enter the winter withdrawal season with 3.7 Tcf in storage andcurrently project we will end winter with 1.7 Tcf, above levels in March 2009. We believethat for a more meaningful spike in front-month natural gas prices to stimulate additionaldrilling activity the Street will need to become more concerned that natural gas storagelevels could fall to a normal or low level. We see a greater likelihood this begins to happen(even with our March projection) towards year-end. As a result, we have lowered ournatural gas price estimates for 2009 to reflect $3.75/MMBtu for 2Q, $4.00/MMBtu for 3Qand $5.00/MMBtu for 4Q.
Exhibit 4:
 
We project gas storage to remain above 5-year range until Summer 2010
Weekly natural gas storage, Bcf
 
5001,0001,5002,0002,5003,0003,5004,000Q1Q2Q3Q4
   B  c   f
5-year average200820092009E2010E
 
Source: EIA, Goldman Sachs Research estimates.
However, we are approaching the key inflection point where storage shouldbegin drawing versus the five-year average, supportive of rising prices.
As seen inExhibit 5, we believe we are nearing an inflection point when natural gas storage will movefrom building versus five-year averages to drawing versus five-year averages. As a resultof the poor economy and production growth, we have been building storage since July2008. We expect this to reverse in August 2009 and continue through much of 2010 due toimproved demand comparables and lower supply. As seen in Exhibit 6, this hashistorically represented an inflection point for natural gas prices. We project rising pricesthrough 2010 as a result of this trend. Our $5.00/MMBtu 4Q2009 gas price mirrors ourviews that improved storage trends will lead to higher prices but that a wave of new rigactivity may not be warranted ahead of winter.
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