Exploration, production companies could benefit as natural gas prices appear set to rise from record lows; analyst projects increases in benchmark natural gas prices for each of next three years

NEW YORK , August 12, 2011 () – Natural-gas prices have nowhere to go but up, an analyst for Brean Murray Carret & Co. said Friday, and that's good news for companies that look for and produce the fuel.

Analyst Raymond Deacon started coverage of oil and gas exploration and production companies with a positive outlook. Deacon initiated "Buy" ratings for Chesapeake Energy Corp., Cabot Oil & Gas Corp., EQT Corp. and Gulf United Energy Inc. He also assigned a "Hold" rating to Rex Energy Corp.

In morning trading, Chesapeake shares rose 79 cents, or 2.6 percent, to $31.68; Cabot rose 74 cents to $71.94; EQT rose 32 cents to $54.16; and Rex rose 47 cents, or 3.9 percent, to $12.63.

Deacon said that despite warmer-than-average weather in July, natural gas prices appear to be on the rise from record lows and projected increases in benchmark natural gas prices for each of the next three years.

The analyst also said the companies could benefit from North American exports of liquefied natural gas, given the low financial and political risks associated with natural gas in North America and its relatively cheap cost. He pointed to BHP Billiton Ltd.'s plans to buy Petrohawk Energy Corp. as a sign of global demand for North American natural gas.

Global natural-gas prices are significantly higher than those in North America, and that spread should widen as Germany and Japan begin to more heavily rely on natural gas for power generation over the next year, he said.

"Plans to take liquefied natural gas to Europe and Asia likely drove a number of the larger industry joint ventures over the past three years and surprised investors at the value of undeveloped acreage in shale plays with attractive economics," Deacon wrote in a note to investors.

The analyst said natural gas prices should begin to rally late this year, as drilling activity continues to shift toward oil and natural gas production in places like the Haynesville gas shale, Wyoming and the Gulf of Mexico declines.

Deacon said Chesapeake, EQT and Cabot are his top picks for the sector, while Gulf United also looks attractive. He said the market still isn't seeing the profit potential of EQT's midstream operations, while Cabot's land could be worth $50,000 to $80,000 an acre fully developed.

In addition, Deacon recommended buying shares of natural gas companies like EQT and Cabot that haven't already formed joint ventures in the Marcellus shale, a massive rock formation underlying New York, Pennsylvania, Ohio and West Virginia.

Shares of other companies have surged after announcing joint ventures there, he said.

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