FBR Capital Markets Picks Natural Gas Stocks

Rehan Rashid, Energy Analyst at FBR Capital Markets, highlighted the natural gas industry in Barron’s today and laid out his stock picks:

a. During last several years, natural-gas prices, on average, have been significantly higher than the cost of marginal supply, thereby providing material excess returns to the industry.

b. Current futures prices imply significant excess returns for, and hence continued production from, even the most the marginal natural-gas producer. When this outlook is combined with an assessment of significant production growth from the five major shale plays and an anemic natural-gas demand growth forecast for 2009-2012, he sees the natural gas market oversupplied  in 2010/2011.

c. He believes that a pricing signal is now needed that is low enough to induce a negative supply response from marginal producers in the presence of material low-cost shale-gas growth.

d. He is lowering r rating on the U.S. exploration and production (E&P) sector to Market Weight from Overweight; believes that gas-on-gas competition should cause prices to drop even below marginal production.

He would SELL:

( Stone Energy (ticker: SGY) and ( Mariner Energy (ME)), as well as high-cost conventional Gulf Coast producers and/or marginal shale players like St. Mary Land & Exploration (SM).

He would BUY:

companies seeing increasing associated cash flows ( Devon Energy (DVN), Southwestern Energy (SWN), Range Resources (RRC) and Newfield Exploration (NFX); and  Petrohawk Energy (HK)) could be a takeover candidate.

Track Rehan’s picks at:

http://trackthepros.com/categories.php?category_id=1329