At a March energy conference hosted by Raymond James & Associates, the investment-banking firm heard a common view shared by 50 energy presenters and scores of institutional investors: There’s bullish sentiment about energy stocks that have exposure to natural gas.

This aside, Raymond James remains bearish in its 2008 natural gas call.

Why this contrarian view? Energy equity researchers at the firm believe that despite recent weather-driven improvements in the U.S. natural gas market, a major gas-supply increase this summer could well translate into gas-on-gas competition, driving natural gas prices down to $5 per million Btu—way below the recent 12-month gas futures strip price of $9-plus.

“Despite the verbal abuse heaped upon us by both buysiders and energy companies, we continue to believe that it is too early to buy into $10 summer natural gas prices,” insists J. Marshall Adkins, director of energy equity research for Raymond James in Houston.

First and foremost, he points out that year-over-year daily gas supply this past December was up 4 billion cubic feet (Bcf) or 7%, and that company guidance suggests year-over-year supply growth could actually increase this summer.

“Secondly, we are modeling U.S. liquefied natural gas (LNG) imports to be down for the full-year 2008, but up modestly through the middle of the summer.”

Finally, Adkins believes the gas market is underestimating the amount of gas-fired electric demand that will be displaced by high Northwest snowpack levels. True, he concedes that industrial demand and gas-fired generation is growing rapidly—daily gas demand could be up between 1 and 2 Bcf. However, record snowpack levels will likely drive very strong hydroelectric generation this summer, potentially displacing as much as 1 Bcf of gas demand.

“In total, our summer 2008 gas-supply model says that we are likely to have about 2 Bcf of more net daily gas supply (year over year) in the system.”

On the flip side of the coin, Shannon Nome, E&P analyst for Deutsche Bank Securities in Houston, expects daily gas supply and demand to be tighter by about 1 Bcf this year versus last, resulting from demand growth, lower imports and declines in conventional producing assets, partly offset by ongoing production growth in unconventional basins.

“Last year, natural gas prices averaged $7.12 at the Henry Hub and our forecast this year calls for an average price of $7.75,” she says.

Nome’s fundamental thesis on U.S. natural gas production holds that accelerating decline rates resulting from the increased emphasis on unconventional-resource plays, along with diminishing efficiency gains from new rigs and completion methods amid a stagnant gas-rig count, will serve to curb future production-growth rates.

“On the demand side, we think latent growth in weather-normalized residential and commercial gas demand, stabilizing industrial-sector gas consumption and ongoing secular growth in demand from power generation may reverse recent-year declines in total U.S. consumption,” the analyst contends.

Meanwhile, she believes tight global LNG markets have constrained U.S. cargo flows, suggesting flat-to-down imports this year. Likewise, she expects Canadian gas imports to roll over in 2008—the second year of a pronounced drilling downturn north of the border.

Against this backdrop, Nome’s conviction in the longer-term fundamental bull base for the upstream sector remains unchanged, and she is estimating 20%-plus price appreciation for several of her top stock picks, including Chesapeake Energy, Delta Petroleum, Equitable Resources, Exco Resources and XTO Energy.

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