The price of natural gas was decoupled from crude prices in 2007 and has never recovered. For a time in 2006, natural gas flirted with prices around $14/tcf, but that didn’t last long. The difference is due almost entirely to scarcity. Will natural gas recover even a little during 2011 or 2012? And how high will natural gas prices go?

The US Energy Information Administration projects an average price for natural gas of $4.24/tcf by the end of 2011, which is $0.15 lower than the average price in 2010. In 2012, the EIA expects a natural gas price of $4.41/tcf. In order to make a profit on natural gas, the industry needs a price in the range of $6-$8/tcf. That’s certainly not going to happen in the next 16 months unless some event of Biblical proportions should occur.

The 10 largest producers of natural gas in 2009 (the last year for which figures are currently available) were, in order, Exxon Mobil Corp. (NYSE: XOM), BP plc (NYSE: BP), Chesapeake Energy Corp. (NYSE: CHK), EnCana Corp. (NYSE: ECA), ConocoPhillips Corp. (NYSE: COP), Devon Energy Corp. (NYSE: DVN), EOG Resources, Inc. (NYSE: EOG), Anadarko Petroleum Corp. (NYSE: APC), Ultra Petroleum Corp. (NYSE: UPL), and Questar Corp. (NYSE: STR). Exxon’s top ranking includes its acquisition of XTO Energy, which had not officially been completed in 2009.

US natural gas production has changed dramatically since the adoption of horizontal drilling and hydraulic fracturing (fracking) of gas deposits trapped in nearly impermeable rocks generically called shale. Fracking makes much more gas recoverable and at a faster rate than conventional drilling. That’s one of the industry’s problems.

Leaseholders must drill within a specified period — usually three years — or lose their lease rights. Perhaps equally important is the nature of the hottest drilling areas themselves — shale gas fields, unlike their conventional counterparts, ordinarily ramp to full production much more quickly, hitting a peak quickly and producing an estimated 50% of lifetime production in the first year of operation.

The irony is that as shale gas production ramps up, conventional production is falling. The EIA estimates that natural gas production between now and 2035 will rise by an annual average of just 0.8%. But that’s a medium-to-long-term average. In the short run, production is rising quickly and depressing prices.

Over the longer term, natural gas prices are poised to rise. Gas-fired power plant construction is increasing as older and more polluting coal-fired plants are being taken out of service. The Daiichi Fukushima disaster in Japan has chilled nuclear power plant development and new US nuclear plants may never be built. Neither of these is having an immediate effect on natural gas prices, but both are medium-term boosters to gas prices.

A more significant impact could come in the somewhat longer term in global demand for liquefied natural gas (LNG). The bounty of US natural gas made available by horizontal drilling and fracking could be converted to LNG and shipped overseas. One US company, Cheniere Energy, Inc. (AMEX: LNG) that was planning to import LNG has been granted authorization to export LNG and expects to begin shipments in 2015.

None of this will affect natural gas prices for the rest of this year or into 2012. As summer’s heat gives way to cooler temperatures, demand for air conditioning will drop, reducing demand for natural gas. Demand will pick up again as the heating season begins, but summer is now the bigger demand period for natural gas and heating season supplies are likely to be plentiful.

An average price of no more than $4.10 is likely where natural gas will finish the year. For 2012 that could rise to $4.25, but anything higher seems unlikely. At least that’s the view from here.

Paul Ausick

In connection with that report, the EIA also posted a list of the Top 100 oil and gas operators based on data supplied to both the EIA and the SEC.  In 2009, about 90% of all proved reserves of oil and gas are operated by the top 100. The top 10 accounted for 54% of crude oil reserves and 48% of wet gas reserves. Interestingly, the top 100 operators represent less than 1% of the more than 14,000 US operators.

We wanted to take a look at the top ten natural gas operators and where they are producing most of their product. Ranked by proved reserves, the top 10 operators, in order, are BP plc (NYSE: BP), Chesapeake Energy Corp. (NYSE: CHK), XTO Energy (before its 2010 acquisition), Encana Corp. (NYSE: ECA), ConocoPhillips (NYSE: COP), Devon Energy Corp. (NYSE: DVN), ExxonMobil Corp. (NYSE: XOM) (before the acquistion of XTO), EOG Resources Inc. (NYSE: EOG), Anadarko Petroleum Corp. (NYSE: APC), and Ultra Petroleum Inc. (NYSE: UPL).  Together, these 10 companies operate 135 trillion cubic feet of natural gas reserves.

The largest increase in reserves came in the state of Louisiana, where proved reserves in the Haynesville shale play boomed by 77%, to 9.2 trillion cubic feet. Shale gas accounted for more than 90% of the total additions to US wet gas reserves in 2009.

The shale gas play that produces the most gas is the Barnett shale, centered around the Dallas-Fort Worth area. In 2009, production from the Barnett shale totaled 1.75 trillion cubic feet, and the total reserves total 26.5 trillion cubic feet. Reserves in the Barnett shale increased by about 4 trillion cubic feet, even with production totaling 318 billion cubic feet.

The Haynesville shale, including another area known as the Bossier shale, saw reserves climb from just over 1 trillion cubic feet in 2008 to nearly 10.5 trillion cubic feet in 2009. Production grew more than tenfold, from 25 billion cubic feet to 321 billion cubic feet.

The two largest operators in the Barnett shale are Chesapeake and Devon. The two largest operators in the Haynesville shale are Chesapeake and Petrohawk Energy Corp. (NYSE: HK), according to Oil & Gas Financial Journal.

Of the top 10 operators, all but Anadarko have substantial operations in the Barnett shale. The Haynesville shale got a lot of attention in 2009, but the focus has shifted a bit to the Eagle Ford play on the Texas-Mexico border, where the gas has a very high concentration of NGLs.

The NGLs — butane, propane, pentane, and the like — are what make drilling for and producing natural gas economically viable while prices for natural gas hover around $4.00-$4.30 per thousand cubic feet. Gas prices need to rise to between $5 and $7 per thousand cubic feet to see the gas by itself profitable. Compare that with an NGL price of around $35/barrel, and its plain to see why the next big move is toward liquids-rich fields. Chesapeake said in its most recent quarterly report that it plans to increase liquids production by 80% in 2011 and another 60% in 2012.

For the foreseeable future, the Barnett shale remains the mother lode of US shale gas plays. It could well be displaced in the future, but that day is a ways off yet.

Paul Ausick

athenahealth (NASDAQ: ATHN) downgraded to market perform at JMP Securities, cut to neutral at Baird.
Bare Escentuals (NASDAQ: BARE) Cut to Hold at Citigroup.
China Unicom (NYSE: CHU) Raised to Buy at eutsche Bank.
Ciena Corp. (NASDAQ: CIEN) Cut to Hold at Stifel Nicolaus.
Dr. Pepper Snapple (NYSE: DPS) Cut to Neutral at Goldman Sachs; Cut to Hold at Stifel Nicolaus.
El Paso Pipeline (NYSE: EPB) Raised to Buy at UBS.
Equity One (NYSE: EQY) Cut to Sell at UBS.
Lamar Advertising (NASDAQ: LAMR) Raised to Overweightat JPMorgan.Motorola (NYSE: MOT) Cut to Neutral at UBS.
Palm Inc. (NASDAQ: PALM) Cut to Hold at Kaufman Bros.
Triquint Semiconductor (NASDAQ: TQNT) Started as Buy at Stifel Nicolaus.
Ultra Petroleum (NYSE: UPL) Cut to Hold at Stifel Nicolaus.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Autodesk Inc. (NASDAQ: ADSK) Raised to Buy at Needham.
Banco Santander (NYSE: STD) Cut to Underweight at Barclays.
Banco Bilbao Vizcaya Argentaria (NYSE: BBVA) Cut to Underweight at Barclays.
Bucyrus International (NASDAQ: BUCY) Started as Buy at Goldman Sachs.
EOG Resources (NYSE: EOG) Raised to Buy at Goldman Sachs.
EXCO Resources (NYSE: XCO) Raised to Conviction Buy List at Goldman Sachs.
Leap Wireless International (NASDAQ: LEAP) Reiterated Hold ahead of earnings at Auriga.
STEC Inc. (NASDAQ: STEC) cut to Hold at Deutsche Bank; Cut to Neutral at JPMorgan; Cut to Market Weight at Thomas Weisel.
Time Warner Inc. (NYSE: TWX) Started as Buy at Janney Montgomery.
Ultra Petroleum (NYSE: UPL) maintained Buy but removed from Conviction Buy List at Goldman Sachs.

You are invited to join our free daily email distribution list to hear about top analyst upgrades and downgrades, IPOs and secondary offerings, ongoing day trader and options trader alerts, stock and market rumors, Buffett and guru investor news, M&A and more.

JON C. OGG

Stephen Schwarzman, head of financial firm Blackstone (BX), made over $702 million in 2008 based on data from The Corporate Library.

Schwarzman made almost all of the money on the vesting of shares in Blackstone which he received when the company went public. Blackstone stock is down over 40% during the last two years, but the CEO does not appear to be paying for that.

The most stunning name on the top ten compensation list of 2008 is Michael Jeffries of Abercrombie & Fitch (ANF). Its sales have been falling in double digits for month. Jeffries made $72 million, 86% of that from the exercising of options and vesting of restricted stock. ANF shares are down 55% over the last two years.

Larry Ellison, the founder of Oracle (ORCL) was No.2 on the list with total compensation of $557 million. His board has a strong defense for his pay package. Oracle’s shares are up over 15% during the last two years while the DJIA has dropped almost 30%.

The boom in energy prices, which largely ended last year, helped line the pockets of eight of the top ten CEOs who all run petroleum or coal companies.

Ray Irani of Occidental  (OYX) made $224 million. John Hess of Hess (HES) made $160 million. Mark Watford of Ultra Petroleum (UPL) made $117 million. Aubrey McClendon of Chesapeake Energy (CHK) made $114 million. Bob Simpson of XTO (XTO) made $104 million. Mark Papa of EOG Resources (EOG) made $90 million, and Eugene Isenberg of Nabors (NBR) made $79 million.

With the collapse in energy prices, the oil chiefs are not likely to make the list release a year from now.

Douglas A. McIntyre

• CIGNA (NYSE: CI) raised to Buy at UBS.
• FPL Group (NYSE: FPL) raised to Overweight at Lehman.
• Gap Inc. (NYSE: GPS) Cut to Neutral at UBS.
• Hawaiian Airlines, Inc. (NYSE: HA) raised to Outperform at Bear Stearns.
• Lehman Brothers (NYSE: LEH) downgraded to Perform from Outperform at Oppenheimer.
• Monsanto (NYSE: MON) raised to Buy at UBS.
• Potash Corp. opf Saskatchewan (NYSE: POT) raised to TOP PICK at RBC Capital.
• Ultra Petroleum (NYSE: UPL) started as Outperform at Credit Suisse.
• Wells Fargo (NYSE: WFC) downgraded to Underperform at Robert W. Baird.
• Xyratex (NASDAQ: XRTX) raised to Outperform at Wachovia.

Jon C. Ogg
March 24, 200

A firm called United Energy now has a $120 target near-term for oil, and recently and at the end of February we saw Deutsche Bank ponder the thought of a $150/barrel price for oil.  Now we have Goldman Sachs (NYSE: GS) joining the fray with a call that at least ponders (not predicting) prices far north of its last $135 super-spike call that had been raised from $100/barrel.  Goldman Sachs isn’t really predicting $200 oil, but they are discussing the possibility of such.  One thing it has done is raised the lower-end floor of its 2008 to 2012 band to $60.00 per barrel.  It even noted that average selling prices were going to remain high: 

• Average $95/barrel in 2008,
• Average $105/barrel in 2009,
• and Average $110/barrel in 2010.

Keep in mind this call was very much of a hedged call today that is more of a possibility and conceptual call, so don’t go out thinking that this was a do or die prediction.  Goldman Sachs did issue some favorite stocks in the oil patch as well, and it is keeping its predictions high for the sector and the commodities in there as well.  This would allow for more of these to oils to hike their dividends.  but we would note that less than a month ago we saw Goldman Sachs cut its coal targets.

It added Ultra Petroleum (NYSE: UPL) and Encore Acquisition (NYSE: EAC) to its America’s Buy List, but it simultaneously removed Forest Oil (NYSE: FST) and Quicksilver Resources (NYSE: KWK) from the list with neutral ratings.  Most refiner estimates were lowered as a result and is neutral on integrated oils in hopes of a pullback. It still has an attractive coverage view for these.  El Paso (NYSE: EP) was also raised to Buy in the coverage today to the Americas Buy List.

With oil north of $105 today, T. Boone Pickens is feeling major pain IF he is still short like he recently noted.  He’s been right the whole way up calling for $80 before he’s 80 and then calling for $100 in different calls in 2007.  Pleas keep in mind that Goldman Sachs has been making more positive calls in the group since mid to late-February so considering all of these as fresh calls is not really the case.  But a mere notion of $200/barrel is something that has many traders talking, and traders are using technical patterns and fear more and more right now.

Traders have been using oil and gold to hide out in to avoid the weakness in the U.S. Dollar.  If we see prices go that high, the United States will have to change the name of the currency to the US Peso.  We’ve already seen how OPEC is blaming the U.S. for current prices.  This would do wonders for Jim Cramer’s latest natural gas pick.

True die hard contrarians would be clamoring for this as an opportunity to sell, but being vocal about that right now would be no different than painting targets on their bodies head to toe.  In fact, finding any that are calling for the party to be over in oil is rather difficult.

Jon C. Ogg
March 7, 2008

• Barrick Gold (NYSE: ABX) downgraded to neutral at Credit Suisse.
• Biodel (NASDAQ:    BIOD) started as Overweight at JPMorgan.
• Flotek Ind. (NYSE: FTK) started as Outperform at bear Stearns.
• Golar LNG (NASDAQ: GLNG) downgraded to Hold at Jefferies and downgraded to Market Perform at FBR.
• Overseas Shipholding (NYSE: OSG) raised to Outperform at Bear Stearns.
• Telefonica SA (NYSE: TEF) raised to Buy at UBS.
• 3Par (NYSE: PAR) started as Buy at Merriman Curhan Ford.
• Ultra Petroleum (NYSE: UPL) downgraded to Neutral at JPMorgan.
• Xilinx (NASDAQ: XLNX) raised to Buy at UBS.

Jon C. Ogg
February 27, 2008

• Allstate (ALL) raised to Outperform at FBR.
• Corning (GLW) started as Buy at Jefferies.
• Echostar (DISH) raised to Market Perform from Underperform at Bernstein.
• General Motors (GM) removed from JPMorgan Focus List.
• Intel (INTC) downgraded to Neutral from Overweight at JPMorgan.
• Investment Technology (ITG) raised to Buy from Neutral at Banc of America.
• Johnson & Johnson (JNJ) started as Buy at UBS.
• PNM Resources (PNM) raised to Buy from Hold at Jefferies.
• Respironics (RESP) downgraded to Neutral from Buy at Banc of America.
• Ultra Petroleum (UPL) started as Neutral at Sun Trust Robinson Humphrey; just noted last night by Cramer on MAD MONEY as his natural gas stock of 2008.

Jon C. Ogg
January 4, 2008

Ultra Petroleum (NYSE: UPL) is his winner for the sector.  There are energy companies focused on production growth, and they raised quarterly production growth by over 30% for 2007 and by 12.1% for 2008.  The company is awaiting some government decision that may allow an eightfold increase in the number of wells in the area it operates in with year-round drilling.  He thinks this was great before but with the Bureau of Land Management decision coming, it could be much higher.

Last night Jim Cramer said that Halliburton (NYSE:HAL) was still one of his picks in the sector too that he wants to stick with, and that  was one of 2007′s top value stocks he gave.

If you want the full summary of our key Cramer picks from 2007 that still are active or that will be built upon in 2008, you can access "Cramer backward and forward 2007 into 2008" here.

Jon C. Ogg
January 3, 2008