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January 3, 2010 Americas: Energy: Oil & Gas - E&PGoldman Sachs Global Investment Research 1
January 3, 2010
Americas: Energy: Oil & Gas - E&P
2010 outlook: Rangebound natural gas no reason to ignore all E&Ps
Premium multiples for E&Ps deserved due to resource exposure
While we expect rangebound natural gas prices in 2010-2011, we see E&Psthat largely dominate lower-cost N. American gas resource plays as regionalbeneficiaries vs. integrated oils and private producers, warranting premiummultiples vs. historical averages. The December rally and recent M&A haverecognized some of this – E&Ps trade at 6.5x 2010 EV/EBITDA on $5.50/ MMBtu Henry Hub gas and $90/bbl WTI oil (vs. 6.2X, 5-yr average). We see16% upside to target prices on avg, 17%-31% for Buy-rated stocks. Wemaintain our Neutral coverage view but view a pullback as an opportunity.
Key themes for 2010 outperformance
Key themes for outperformance include: (1) Marcellus Shale/Granite Washexposure (UPL, NFX, APA); (2) Ongoing/potential restructuring (STR, DVN);and (3) Materiality of emerging low-cost resource plays (DVN, APA, STR,NFX, UPL). We also expect 2010 to be an active deepwater oil explorationyear; APC appears best positioned to benefit from continued investor focus.
UPL/NFX/STR 2010 top picks; UPL now CL-Buy, CHK now Neutral
Our three favorite stocks for 2010 are UPL, NFX and STR. We upgradeUltra Petroleum to Buy from Neutral and add it to the Americas ConvictionList as its growth and returns, flexibility from the Marcellus and PinedaleAnticline, catalysts and resource upside make it a beneficiary regardless ofwhether 2010 brings low or high gas prices. We lower Chesapeake Energyto Neutral from Buy despite attractive resource upside following recentstrong relative performance. Devon Energy and Pioneer Natural Resourcesremain Buy. Bill Barrett, Mariner Energy and Noble Energy remain Sell.
Henry Hub gas in $4.50-$7.00/MMBtu range, $5.50/$6.50 in 2010/11
We see natural gas prices as rangebound between $4.50-$7.00/MMBtu dueto the material potential supply response (production and near-term LNGimports) to higher prices and demand response (coal-to-gas substitution)to lower prices. We continue to expect 2010 Henry Hub gas prices toaverage $5.50/MMBtu and see a rebound to $6.50/MMBtu on average in2011 (reduced from $7.00/MMBtu). Longer-term demand trends areimproving due to coal plant retirements and pending carbon policy.
Updating estimates and selected target prices on above themes
These also reflect updated realized prices/production/costs/budgets.
RELATED RESEARCH
Americas: Energy: E&P: “E&P M&A – Shale gas, oil sands,deepwater oil to remain in favor”, Brian Singer and team,December 16, 2009Americas: Energy: Oil: “2010 preview: Oil-grinding higher,Refining-struggling at trough”, Arjun Murti and team,December 15, 2009Americas: Energy: E&P: “E&P asset strength on display inHouston; NBL now Sell”, Brian Singer and team, November13, 2009
RATINGS AND TARGET PRICE CHANGES
ReturnNewOldNewOldpotentialLarge-cap E&P
APA Buy Buy $128 $121 23%CHK Neutral Buy $32 $32 21%ECA Neutral Neutral $35 $34 12%EOG Neutral Neutral $110 $108 11%
Mid-cap E&P
COG Neutral Neutral $51 $47 15%XCO Neutral Neutral $25 $22 14%NFX Buy Buy $62 $60 25%PXD Buy Buy $58 $55 17%SWN Neutral Neutral $56 $52 13%UPL Buy Neutral $67 $60 31%
Small-cap E&P
BRY Neutral Neutral $35 $32 16%BBG Sell Sell $33 $32 3%EAC Neutral Neutral $50 $45 3%ME Sell Sell $13 $14 9%KWK Neutral Neutral $18 $16 15%
Ticker 6-mo Price TargetRating
Source: Goldman Sachs Research estimates.
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. 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
January 3, 2010 Americas: Energy: Oil & Gas - E&PGoldman Sachs Global Investment Research 2
Table of contents
Rangebound gas no reason to ignore all E&Ps; Buy UPL/NFX/STR 32010 themes:
Marcellus/Granite Wash, restructuring, resource emergence
5Low-cost, visible growth suggests premium multiples at low gas prices 9Top picks for 2010:
Ultra, Newfield, Questar
19Natural gas:
$4.50-$7.00 range until long-term demand step-up
24Gas production:
Rig mix shift adds confidence in unique growth by covered companies in 2010
29We expect small changes in imports and demand in 2010 34Updating estimates and selected target prices for E&Ps 40Disclosures 48
The prices in the body of this report are based on the market close of December 29, 2009.
January 3, 2010 Americas: Energy: Oil & Gas - E&PGoldman Sachs Global Investment Research 3
Rangebound gas no reason to ignore all E&Ps; Buy UPL/NFX/STR
While we expect natural gas prices to be rangebound in 2010-11 due to the potentialfor supply response to prices above $6.00-$6.50/MMBtu and demand response below$4.50/MMBtu, we see E&Ps that largely dominate the lower cost resource plays asregional beneficiaries vs. integrated oils and private producers. We believe E&P stocksdeserve premium multiples vs. historical averages to reflect greater resource credit,and we raise target prices on selected exposed stocks (in addition to other estimatesand target prices adjustments). Our Buy-rated stocks largely reflect 3 key themes for2010: (1) Marcellus Shale and Granite Wash exposure; (2) ongoing/potentialrestructuring; and (3) materiality of emerging low cost resource plays. UPL, NFX andSTR are our top 3 favorites. We upgrade UPL to CL-Buy from Neutral and lower CHKto Neutral from Buy. We maintain a Neutral coverage view (16% return potential)following the December rally though we would view a pullback as an opportunity.
Exhibit 1:
E&P and Coal ratings and rankings
Attractive coverage views on E&P and Coal sectors
E&PE&PE&PCoalLarge-capMid-capSmall-capAll-cap(Neutral)(Neutral)(Neutral)(Attractive)Buy
DVNUPL, STR, NFXANRAPABTUPXDMEE
Neutral
APCPXPTLM, CHKXCOSDACI, CNXEOGCOG, SWNBRY, KWKECAXTOEAC, FST
Sell
NBLBBG, MEPCX
Source: Goldman Sachs Research estimates.
Exhibit 2:
Key commodity price forecasts for oil, natural gas and coal
OilNatural gasUS Coal (physical pricing, $/ST)Int'l coal ($/metric ton)WTIHenry HubCAPPNAPPPRB 8800Asia metNewcastle therm
1Q 2009 $43.18 $4.75 $56.27 $71.12 $11.34 $300 $692Q 2009 $59.69 $3.75 $47.65 $52.00 $8.53 $129 $643Q 2009 $68.14 $3.40 $45.85 $47.00 $7.83 $129 $704Q 2009E $75.00 $4.27 $50.30 $50.92 $8.53 $129 $75
FY 2009E$61.50$4.04$50.02$55.26$9.06$172$69
1Q 2010E $85.00 $5.50 $55.00 $50.00 $10.00 $129 $752Q 2010E $85.00 $5.00 $55.00 $50.00 $10.00 $180 $853Q 2010E $90.00 $5.50 $55.00 $50.00 $10.50 $180 $854Q 2010E $100.00 $6.00 $55.00 $50.00 $11.50 $180 $85
FY 2010E$90.00$5.50$55.00$50.00$10.50$167$822011E$110.00$6.50$60.00$55.00$12.00$165$892012E$105.00$6.50$65.00$60.00$12.00$140$862013N$85.00$6.50$70.00$65.00$13.00$111$72
Revisions: 4Q 2009 oil from $77; 4Q 2009 gas from $4.50; 1Q 2010E gas from $5.00; 4Q 2010E gas from $6.50; FY 2011E gas from $7.00
Source: Goldman Sachs Research estimates.
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