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Neal Dingmann's Main Points

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Neal Dingmann
Fundamental Energy Outlook

  • Fundamental Upside
    • Today's environment is different than it has been in the past, as macro factors currently support the energy picture
    • Supply and demand imbalance
      • Flat to decreasing supply - lower quarterly production, lower exports, and few near-term alternatives
      • Increasing demand - higher industrial use, higher GDP, higher GNP
    • Increasing asset sales
    • The start of REAL growth in pricing/margin
    • High crude oil price support
      • Tight capacity/political unrest
    • While all energy sectors should benefit from the macro outlook, the OSX and XNG are most levered (generally)
  • Less Supply - Details
    • U.S.
      • Q2 '04 domestic gas production was down 3-3.8% YoY, after a previous decline of 4.2-4.4% in Q1
    • Mexico
      • Now a bigger importer of natural gas, the country's demand for this fuel has outpaced its production in the past decade
    • Canada
      • Since peaking in 2001, annual natural gas exports to the U.S. have fallen, declining 11.4% from 2002-2003
    • LNG
      • While estimates vary regarding timing and incremental supply, domestic regulation could present a tough obstacle
    • Nuclear
      • Currently over 96% of capacity, which is 2% higher than the same period last year
    • Coal
      • Current prices of $59.50 / short ton are the highest in history
  • Growing Demand - Details
    • U.S.
      • Energy Information Administration (EIA) is forecasting the demand for natural gas to rise 1.1% YoY in 2004
    • Alternative Sources
      • Demand for coal, hydro, nuclear, and other energy sources is expected to rise in 2004
    • Macro Demand
      • Q2 '04 GDP rose 7.0% YoY, after rising 5.6% in 2003
  • Crude Price Support
    • With the price of crude at $44.50/bbl, it is hard to imagine natural gas falling below $5.50/Mcf in the near future
  • Domestic Natural Gas Drilling
    • Primary Driver
    • 80% of U.S. drilling is directed toward natural gas
    • Expectations of higher natural gas prices influence spending on U.S. drilling activity
    • Strong commodity prices are drivers in our U.S. rig forecast. We are expecting the U.S. rig count to be up 14% in this year, and up another 1% in 2005
      • While rig count totals can vary, there is no questioning the higher rig growth or utilization
      • The big difference between the present upcycles in land drilling rates and utilization versus the upcycles in 200/2001 is the rate of increase. Since the rate is more moderated this time, I believe the upcycle can last longer
      • Higher U.S. rig activity has historically coincided with a higher OSX price
  • Current Upcycle Performance
    • In the upcycle that has taken place between October 2001 and today, small/mid cap service and land drillers have outperformed all other sub-sectors
No positions in stocks mentioned.

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