Although the S&P 500 E&P Index by mid-summer fell 9% from the start of 2006, investors this fall shouldn't yield to bearish sentiment about the upstream amid recent pressure on natural gas prices. While it may take months to shake off near-term bearish natural gas dynamics, "we are firm believers in the argument that basin maturity in North America and elsewhere will keep commodity prices stronger for longer and underpin the [market] value of producers with large, low-risk drilling inventories," says Shannon L. Nome, E&P research analyst for Deutsche Bank Securities Inc. in Houston. The analyst contends the present natural gas storage overhang is readily observable and is arguably being largely discounted by the market already. More significantly, she is unconvinced that natural gas supplies can grow materially, lacking further rig-count momentum, which itself seems reliant on gas prices above recently depressed levels. "Any let-up in drilling from here will expose the industry to sharp, hyperbolic initial declines from nascent unconventional plays," says Nome. "Since E&P stocks track long-term commodity prices, as opposed to spot prices, we believe they already discount just about anything short of a catastrophic outcome for natural gas this fall." The analyst observes the gas-storage overhang this summer reached about 600 billion cubic feet, a 30% surplus to the five-year rolling average for that time of year and 19% more than the year-ago level. For more on this, see the September issue of Oil and Gas Investor. For a subscription, call 713-260-6441.

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