Fig Partners Research Director Advises Investors To Have Large Exposures To Marcellus, Haynesville and Eagle Ford Shales
January 15, 2010 - The Wall Street Transcript has just published Oil & Gas Production and Distribution Report offering a timely review of the Energy sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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JOSH SILVERSTEIN is currently the Director of energy research at FIG Partners, LLC. Prior to his position at FIG, Mr. Silverstein was a Senior Financial Analyst covering the energy, power and infrastructure sectors for Highbridge Capital Management, LLC, and a Financial Analyst for SILCAP, LLC, a utility-focused Bass Brothers hedge fund. Over the last six years, his primary focus has been investing in domestic natural gas and oil exploration companies.
TWST: We've seen gas prices settle at this $4 to $5 level for quite a while. Is that where they should be?
Mr. Silverstein: Well, we've certainly seen a lot of volatility over the past couple of months and even within the past few weeks. Looking forward towards next year, the calendar strip is around $5.30. But if we were to have this conversation a month ago, it would be $6.30. From my view, it seems like natural gas will average somewhere in the $5.50 to $6.50 range for next year. I think we have seen some weather coming to play recently, but we haven't seen a big demand response. As we look out to the future, long-term prices are in contango, trading in $6.50 to $7.00 range in 2011 and beyond.
TWST: As we look out beyond this year, will we see a more stabilized rig count at this level? Or is it likely to see it pick up again?
Mr. Silverstein: I think we are still going to continue to see the rig count pick up. After reviewing the third quarter conference calls, I think companies are becoming more active in certain plays, and some companies are just switching rigs from one play to another, such as going from the Barnett to the Eagle Ford or to the Haynesville Shales. Additionally, as we mentioned before, service costs have decreased to a point where it could make sense to add rigs.
TWST: Will that continue to push out this crossing point?
Mr. Silverstein: It could push it out towards 2011, but there might not be a one-for-one correlation between the rig count pickup with a pickup in production. There is still plenty of winter left to go, and we'll see what happens in the summer next year in addition to the large amount of LNG liquefaction capacity that has come online, or that will come online over the next two years.
TWST: What is going on in the LNG market? A year go that was supposed to mess up the whole picture here, but it seems to have faded from the scene.
Mr. Silverstein: I think initial expectations were for more cargoes to arrive in the U.S. this year, but there has been a draw towards Spain and the U.K. as the South Hook facility started operations this year. And prices would justify going there versus here. But then again, if there is an excess of LNG liquefaction capacity that comes online, and it doesn't go towards places with storage, then you can certainly see some cargoes coming here.
TWST: Anything going on from a regulatory point of view in the space?
Mr. Silverstein: There are a few things, but I think most of the issues right now are environmental pressures at the state, regional and national levels. For example, there has been a lot of activity up in the Marcellus Shale, and there are concerns over water disposal and concerns over the chemicals that are used downhole in the hydraulic fracturing process. So I think a lot of the focus on the regulatory front is going to focus on the environmental issues, but there could be some regulatory issues going forward, such as CO2 legislation that affects the industry.
TWST: What should investors be paying special attention to?
Mr. Silverstein: If you are a natural gas-focused investor, I believe you should have exposure to the Marcellus Shale. It looks like this basin will produce the highest investment returns on a single well basis. I would also be focused towards the core part of the Haynesville Shale in Northern Louisiana that now extends southeast into Texas. In addition, the emerging Eagle Ford and Horn River Shales look prospective as well.
TWST: Which names should they should look out for in those spaces?
Mr. Silverstein: Companies exposed to the Marcellus Shale would be Cabot Oil and Gas (COG), EQT Corp. (EQT), Range Resources (RRC), Carrizo Oil & Gas (CRZO) and Ultra Petroleum (UPL), but there are many more. One of the larger Marcellus producers is Chesapeake Energy (CHK), who is also the largest producer in the Haynesville Shale. Companies in the core area of this play are Petrohawk Energy (HK)), Questar Corp. (STR), and EnCana (ECA). As you go in towards the emerging extension, EOG Resources (EOG), Southwestern Energy (SWN), Cabot and Devon (DVN) have good acreage. Over in the Eagle Ford Shale, St. Mary Land and Exploration (SM) is one of the smaller companies most levered to the basin with over 250,000 net acres in both the liquids-rich and the dry gas zones. Petrohawk is a big operator down there as well, along with many large competitors. In the emerging horizontal Granite Wash play, Chesapeake is a big producer as well as Apache (APA). St. Mary Land, Forest Oil (FST), Newfield Exploration (NFX)and Questar are there as well.
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