Analyst says energy prices likely to rebound

May 4 - McClatchy-Tribune Regional News - George Hohmann Charleston Daily Mail, W.Va.

Although energy prices have dropped substantially over the past few months, they are likely to rise over the intermediate to long term because the resources are finite and the fundamental demand won't go away, according to an analyst with the Hilliard Lyons brokerage firm.

Joel Havard, a research analyst with the Louisville, Ky.-based firm, spent the past 10 years studying companies that produce consumer durable goods and services. In a December report titled, "Regional Energy Producers: A Search for BTUs in our Backyard," he identified energy as the key expense affecting the region's consumers. Havard now closely follows two coal companies and two natural gas companies with Appalachian assets and plans to track more in the future.

Havard is convinced Wall Street overdid it this past summer when the price of oil hit $147 a barrel and coal was trading at $130 a ton. He thinks that when oil was recently trading for less than $40 a ton -- and with coal still trading around $43 a ton -- prices have overshot to the downside.

"We think the truth lies closer to the middle," he said. "We won't try to predict short-term price moves but as believers in the ultimate finite nature of these assets and the fact that the price collapse has resulted in a significant reduction in investment in new production, we believe the supply-demand dynamic favors rising prices over the intermediate to longer term.

"To put that in context: Most drilling rigs in North America are natural gas oriented. The peak number of rigs operating last summer was approximately 3,000. Just nine months later, that's down more than 50 percent. It's the sharpest drop in the shortest amount of time ever recorded."

Natural gas is currently trading at around $3.40 per thousand cubic feet, a six-year low. Havard believes the current natural gas glut will be worked down by the end of this year or in 2010 and that whatever the demand is, it will be enough to result in higher pricing.

"The coal dynamics are slower moving," although "oil, natural gas and coal -- they're all sticks in the same stream," he said. "They're moving in eddies and with their own currents but they're all going in the same direction at the same time."

Coal projects take a lot longer to get up and running than the time required for natural gas wells. "The lead times through the normal permitting processes and what have become the normal legal challenges stretch these (coal) projects into 10 years or more before the first truck, train or barge load is shipped," Havard said. "The risk for America, we believe, is that underinvestment now can have even more pronounced long-term consequences to supply."

It costs several hundred million dollars to develop a new underground coal mine. Havard noted that credit constraints "are affecting every kind of business you can think of."

Prior to the election, there were some transactions in the capital markets that indicated coal remained attractive to investors.

"That was leading into the election cycle," Havard said. Now, those waters have been muddied by the Obama administration's push for a cap-and-trade proposal aimed at reducing carbon emissions.

"Today in the coal fields the increased permitting, legal and operating hurdles that are being thrown before these companies have raised production costs," Havard said.

"Throw in the wild cards of cap-and-trade, various unproven technologies, and the alleged threats of carbon dioxide and at this stage it's impossible for companies to accurately quantify what compliance costs will be down the road."

Havard believes the unknown risk factor represented by cap-and-trade proposals will have to be resolved before investors are inspired to pour money into major new coal projects.

Havard was in town Thursday to meet and greet Hilliard Lyons customers at the firm's remodeled and expanded office at The Forbes Center in NorthGate Business Park.

Contact writer George Hohmann at business@dailymail.com or 304-348-4836.