Despite a hefty 30% market advance late in first-quarter 2000, most upstream stocks are poised to post further gains in 2000, says Robert Morris, E&P analyst for Salomon Smith Barney in New York. "While crude-oil prices continue to set new standards, the strength in natural-gas prices is what we expect will captivate investors," he says. "In fact, we recently increased our full-year composite spot-price forecast for gas to $3.25 per MMBtu-a figure that may still end up being too low." Morris believes that the next big leg up for the E&P group could come in third-quarter 2000-if not beforehand. Two primary events could boost investor confidence in the sustainability of oil and gas prices. First, the summer driving season is getting under way, concluding the seasonally low-demand period for crude oil, he says. In addition, OPEC members were slated to reconvene at the end of June to assess the effect of their recent quota increase and to make any necessary adjustments to keep West Texas Intermediate spot crude prices in a range of $25 to $30 per barrel. Second, by the end of June, one-third of the traditional gas storage-injection season will have passed with the onset of the peak summer-cooling demand period. "At that point, we believe that storage injections will still be well off pace to refill storage by the beginning of next winter." "It now appears that natural-gas prices have largely disconnected from crude-oil prices and should remain fairly resilient, even if some 'cracks' emerge along the crude-oil price front." The analyst has a strong bias to upstream stocks with high natural-gas exposure, including Barrett Resources, Burlington Resources, Cross Timbers Oil, EOG Resources and Houston Exploration. He also likes the prospects for Anadarko Petroleum-Union Pacific Resources, Apache, Devon Energy and Ocean Energy. "At this point, valuations for our coverage group reflect no more than a $22-per-barrel WTI spot crude price and a composite spot natural-gas price of $2.50 per MMBtu, on average." -Brian A. Toal
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