M&A Will Take Off as Natural Gas Remains Range Bound (WLL) (KOG) (AREX) (PDX)

October 18, 2012 11:31 AM EDT
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After hitting lows below $2 in April, natural gas prices have climbed back to approximately $3.50 per million btu. The increased has been tied to increasing demand, driven by continued coal-to-gas switching, combined with relatively weak supply. For example, this morning the EIA reported natural gas weekly stockpiles rose only 51bcf, well below the 5 year average. In addition, forecasts for more normalized winter weather compared to last year have created a more bullish outlook.

Despite the bullish sentiment, analysts at Oppenheimer Equity Research do not believe prices are sustainable above $4.50 and expect prices to remain between $3 and $4 through 2013.

“We believe natural gas prices will not move meaningfully higher until there is a structural change on the demand side,” said analyst Daniel Katzenberg.

In his view this would require sharp improvement from industrial demand driven by an economic recovery, LNG exports --which at the earliest won’t be seen until 2015 or 2016-- or a transition from gasoline to natural gas for transportation fuels -- which is many years away, said Katzenberg.

While this might not play well for investors owning instruments like Unites States Natural Gas ETF (NYSE: UNG) Katzenberg doesn't think the oil and gas space will be boring heading into year end, and he anticipates M&A activity will pick up.

"From our conversations with management teams, we have heard there are as much as $25 billion of assets being marketed right now, with sellers motivated by the uncertain 2013 tax environment," said Katzenberg.

He thinks corporate-level acquisitions are likely to focus on names in the Bakken and Permian. Names include Whiting Petroleum Corp. (NYSE: WLL), Kodiak Oil & Gas Corp. (NYSE: KOG), Approach Resources, Inc. (Nasdaq: AREX) and Pioneer Natural Resources (NYSE: PXD).

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