?that will carry 1.5 billion cubic feet per day of gas from the Rockies to the Midcontinent and by mid-2009 to markets in the Northeast—is not likely to have a major impact on the overall domestic gas market or on E&P stocks.
“Changes to basis differentials are not likely to significantly alter 2008 cash flows or fundamental NAV (net asset value) valuations for [Rockies] producers,” contends Brian Kuzma, an analyst with JPMorgan Securities in Houston.
Kuzma points out that there is only a small amount of Rockies production currently shut in or wells not completed because of gas-export constraints, “so there will be little new production added with Rex online.”
The analyst believes the additional flexibility the new pipeline provides will not be necessary until summer 2008 when demand in the Rockies drops and additional gas needs to be exported from the region. “Therefore, the start-up of Rockies Express should not be viewed as a catalyst for the natural gas markets.”
This less-than-sanguine outlook aside, Kuzma concedes that the additional takeaway capacity Rex provides is likely to enable E&P companies like Gasco Energy (Amex: GSX), Ultra Petroleum (NYSE: UPL), Delta Petroleum (Nasdaq: DPTR) and Noble Energy (NYSE: NBL) to see better gas pricing than they have recently.
“However, we would argue that most analysts have already factored in more normalized pricing for Rockies producers and the risk to the downside in the event that a new pipeline bottleneck develops this summer.”
While the flexibility that Rex provides will eliminate most of 2007’s well shut-ins in the Rockies, Kuzma observes that this could lead to a faster gas-storage build in the summer of 2008.
Turning to gas regions outside the Rockies, the analyst predicts the Midcontinent and Permian Basin could see lower prices this year. Specifically, he expects lower-than-normal gas prices for producers like St. Mary Land & Exploration (NYSE: SM), Chesapeake Energy (NYSE: CHK) and Brigham Exploration (Nasdaq: BEXP), which all have more than 10% of production coming from unhedged Midcontinent or Permian gas.
“While this will not have a significant impact on 2008 cash flows or financing, we think the Street’s estimates have yet to include these higher basis differentials.”