Oppenheimer's Gheit: NatGas Prices Driven By Production, Not Inventories

by: Hard Assets Investor

By Sumit Roy

Five minutes with Oppenheimer's Gheit on energy.

Fadel Gheit is a managing director and senior analyst covering the oil and gas sector for NewYork-based Oppenheimer & Co. He has been an energy analyst since 1986 and was named to The Wall Street Journal All-Star Annual Analyst Survey four times. HAI's Sumit Roy caught up with Gheit recently to discuss the latest developments in the oil and gas markets.

HardAssetsInvestor: Natural gas inventories have fallen to the lowest level in a decade, yet prices haven't rallied all that much. Why do you think that is?

Fadel Gheit: Gas prices are influenced by the industry's ability to deliver supply rather than by inventories. Gas production will continue to rise because of [associated] gas from oil and liquids-rich plays. In addition, drilling obligations to keep leases will keep output rising.

HAI: What is your price outlook for natural gas?

Gheit: Barring two consecutive years of severe weather, average gas prices will be close to 4.50/mcf until 2018. After that, demand and LNG exports will begin to shrink the oversupply and boost gas prices.

HAI: Brent is near the lowest level in a couple months, but WTI has been outperforming on news of an earlier start to the Seaway pipeline expansion. Do you see any major moves in either oil benchmark this year?

Gheit: Brent prices are inflated by global events and the premium to WTI should stabilize around $3-$4 in the next several months

HAI: Is now a good time to buy refiners ahead of the U.S. summer driving season?

Gheit: Refining stocks have outperformed the whole energy group and the market in the last three years on the back of record crude differentials, cheap natural gas and growing exports. The easy money, however, has been made and a repeat of past performance is not likely. Going forward, the stocks will be more suitable for traders than investors.

HAI: Which energy stocks do you like right now?

Gheit: We prefer stocks with catalysts that could boost valuations such as BP (NYSE:BP), Anadarko Petroleum (NYSE:APC), Hess (NYSE:HES), Marathon Oil (NYSE:MRO), Murphy Oil (NYSE:MUR) and Occidental Petroleum (NYSE:OXY).

We also like Cabot Oil & Gas (NYSE:COG)-a pure dry gas play with the highest production growth rate. It is generating free cash flow, buying back stock and more importantly, is expected to generate industry leading return on capital.