Bullish! That's the stance of most E&P analysts as they talk about their outlook for 2003 natural gas prices and upstream stock valuations. "We continue to believe that investors should be positioning to overweight the E&P sector heading into this winter, given our view of the longer-term fundamentals for natural gas prices," say Robert S. Morris and Michael C. Schmitz, research analysts for Salomon Smith Barney (soon to become simply Smith Barney). The two envision during the next 12 to 18 months a nearly 25% average increase in the share prices of producer stocks under their coverage, which include Apache, Devon Energy, XTO Energy, Canadian Natural Resources, Chesapeake Energy, EOG Resources, Kerr-McGee, Newfield Exploration and Spinnaker Exploration. "While our official forecast for 2003 [calls for] composite spot-gas prices averaging $3.50 per million Btu (MMBtu), natural gas prices this winter could spike higher or average much higher in 2003," says Morris. "In almost any case, the reasonable downside for gas prices in 2003 appears to be no less than $3 per MMBtu." An equally sanguine Frank Bracken, managing director and senior E&P research analyst for Jefferies & Co., sees the dawning of a golden age for gas. He expects that, from 2003-05, Henry Hub gas prices will trade from $3 to $5 per MMBtu, increasing each year in average price. "In a stock market that lacks visibility across many sectors, the natural gas story is more [attractive] than most, and investors should use short-term weakness to develop an overweighted position in the E&P group." He expects this winter will be colder than the last, resulting in increased gas demand for heating. Meanwhile, domestic gas supplies have fallen an estimated 2.4 Bcf per day since second-quarter 2001, and continued-albeit more modest-supply declines are likely, "setting the stage for additional market tightness as demand recovers." Bracken is particularly bullish on gas-demand growth in the electrical-generation sector. "Beyond 2004, when nuclear and coal-fired electrical generation are projected to reach their effective limits, annual natural gas demand could grow as much as 2 Bcf per day-an amount greater than the country's ability to add domestic supply or to add additional volumes in the form of new LNG (liquefied natural gas) terminals."