PXP & XTO Natural Gas Strength

Barrons
CRT Capital Group
OUR NEGATIVE-123 BILLION CUBIC FEET FORECAST [for natural gas next week from working gas in storage] is fundamentally bearish against the five-year average, but an improvement nonetheless from last week, as the first triple-digit withdrawal of the season is shaping up.

We've made downward adjustments to our forecast to account for both nuclear generation increases and additional supply created by what we believe to be gas plants leaving ethane and other liquids in the pipeline due to low natural-gas-liquids prices. While Nymex gas prices are below current costs to incent drilling, we expect lower power costs and rig rates to reduce cost structures in 2009, allowing lower pricing lows, but also making existing price hedges more attractive.

Companies such as Plains Exploration & Production (ticker: PXP) and XTO Energy (XTO) -- both Buy-rated -- feature particularly strong 2009 hedging positions, which we have highlighted in this low-commodity-price environment.

Cold weather moving West to East this week provided some relief to beleaguered Rockies producers, enabling spot prices to post impressive week-over-week gains (up 23% at Opal, Wyo., and up 9.8% at Blanco, N.M., in the San Juan Basin). Below-seasonal norm temperatures have gripped much of the nation this week, with snow in the Pacific Northwest and in the higher elevations of the Southwest, subzero temps in the Upper Midwest, and snow/ice in the Northeast. We are expecting a strong storage withdrawal in next week's report.

The Organization of the Petroleum Exporting Countries dominated the news Wednesday, with the group announcing a larger-than-expected 2.46 million-barrel-per-day cut to supply (from current 27.308 million barrels per day to 24.845 million barrels per day) starting Jan. 1. Russia also signaled its willingness to reduce supply further in 2009, after cutting 350,000 barrels per day in November.

Despite the news, Nymex January crude fell $3.54 per barrel, reportedly on skepticism about OPEC's ability to adhere to its own cuts. Such concern today seems overdone in our view, as OPEC production cheating is a regular occurrence, and a well known part of the equation. Crude inventory figures did not help prices either, rising again this week by 525,000 barrels. Gasoline inventories also increased, while refinery utilization was down 3.32% week over week.

After years of covering Plains Exploration, this week we wrote an update note that is practically a reinitiation piece.

These days, exceptional hedging, differentiated project access, and growth momentum from partnered development and exploration projects stand out from the group. Plausible near-term catalysts include details of ongoing production results in the Haynesville Shale with Chesapeake Energy (CHK), and at Flatrock with McMoRan Exploration (MMR), and finally a possible permit to drill offshore California.

Longer term, we suspect monetizing in-hand discoveries with Royal Dutch Shell (RDSA), an exploration play in Vietnam, and a nonoperated interest in the Madden Field operated by ConocoPhillips (COP) are all on the table. We also propose that Plains and Chesapeake Energy might revive a master limited partnership concept in the Haynesville over time, highlighted in our note.