HOUSTON, Aug 21 (Reuters) - Investors are buying companies like Chesapeake Energy Corp (CHK.N) and Devon Energy Corp (DVN.N) on a bet that the natural gas market has bottomed out, but prices likely will not recover this year with stockpiles at record levels, analysts said.
U.S. natural gas futures are trading at 7-year lows as the global economic slowdown cuts into industrial demand. As a result, domestic inventories have swelled to record levels, government data shows. [ID:nN20240249]
Summer weather has also been mild in the most populated areas of the country, depressing demand for electricity to run air conditioners. An unusually quiet start to the Atlantic hurricane season has also reduced fears that offshore production could suffer.
But even with a bearish outlook for gas prices, the American Stock Exchange index of natural gas producers .XNG, which includes companies like Apache Corp (APA.N) and XTO Energy (XTO.N) climbed more than 2 percent on Friday. The index has climbed 56 percent from the year's low hit in March.
"The perception is that gas has finally gotten to its lowest point, so people are buying exploration and production stocks," Marshall Adkins, energy analyst at Raymond James, said.
In response to the slide in prices, many exploration and production companies have cut production and are drilling wells but not tapping them for gas.
However these actions will not be enough to rescue the oversupplied gas market this year, Adkins said, estimating that producers will need to shut in as much as 10 percent of U.S. supply to keep storage from overfilling.
His firm expects natural gas prices to fall below $2.50 per thousand cubic feet in the coming months.
Houston-based energy research firm Simmons & Co International sees natural gas prices falling as low as $2.25 to $2.50 per thousand cubic feet, representing the marginal cost to produce natural gas.
Still, most expect the natural gas market to rebalance in 2010 as a result of the steep cuts in production made in 2009.
"By the second quarter of 2010, we expect U.S. production to decline 10 percent year over year and replace the storage overhang as the most important fundamental driver of U.S. natural gas prices," Jason Gammel, oil analyst at Macquarie Research said in a note to clients this week.
Stocks likely to do well when natural gas prices recover include high-growth exploration companies like Chesapeake, XTO and Goodrich Petroleum Corp (GDP.N), Gammel said. (Reporting by Anna Driver in Houston; editing by Gunna Dickson)
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