Morningstar Advisor - Fall 2008 - 69

Sector Rap What about Natural Gas? By Paul Justice All eyes are on oil, but advances in drilling technology and an evolving global market makes for interesting times in the natural-gas industry. With commodity price volatility picking up, Morningstar’s oil and natural-gas analysts have taken a long, hard look at the companies that they cover. I sat down with Eric Chenoweth, the associate director of Morningstar’s energy team, to get his take on the state of the North American natural-gas space. Paul Justice: As recent as June, worries had persisted that the world is running out of hydrocarbons. Then in July and August, several ex-energy sectors rallied while claiming that the great “commodities bubble” had popped. Clearly, there is little stability in the market consensus regarding the true state of the energy markets. Specifically regarding North American natural gas, several new productive basins have raised concerns that we may have a 1980s-style supply overhang in the near future. What’s your assessment of the state of natural-gas supplies today? Eric Chenoweth: We expect that natural-gas production will expand in the U.S. in the coming years. Technological advancements (horizontal drilling, fracturing, and completion) have helped the industry gain confidence in unlocking gas from tight shale targets. In particular, success in the Barnett shale (under Fort Worth, Texas, and surrounding counties) has helped embolden many producers to explore the broader shale-gas potential in North America. Fears of an oversupply situation have emerged this year thanks to some very impressive wells drilled in the Haynesville Shale (northern Louisiana and eastern Texas) and some extrapolation of those limited well results. Also, it looks like domestic gas production will expand 5%-10% this year, which is a pretty big gain. One of the big limitations to seeing all of this potential realized in short order (and another investing opportunity) is the new midstream infrastructure (pipelines, gathering systems, and processing plants) that will be required to bring gas from these new producing regions to market. We’re watching the activity in the Haynesville and other shale plays closely. It’s worth noting that foreign sources of gas supply have been weak (especially liquefied natural gas) this year, as natural-gas prices in Asia and Europe have been nearly double what we’ve experienced in the U.S. This global pricing dynamic–if it persists--should limit the flow of LNG to the U.S. The good news in all of this is that the base decline rate for natural-gas is still high in the U.S., which means that the producers need to drill to maintain and grow production. PJ: What about the demand side? EC: Demand for natural gas has evolved considerably over the past decade and a half. The largest single source of natural-gas demand is now power generation (it took the lead from industrial demand definitively in 2007). This trend is continuing to expand, as more new gas-fired power plants get built in the U.S. relative to coal plants. So the outlook for natural-gas demand is good. It’s worth noting that gas demand is very weather-sensitive in any given year, so a cold or warm winter can really influence the price of gas, and it typically leads to a lot of the volatility we see in the stocks of the gas producers. The good news is that demand for gas is less economically sensitive today than it was a decade ago. PJ: How have natural-gas stocks held up regarding these concerns? EC: We had a fairly cold winter last year, so the gas stocks started out the year with a bang. However, as the supply grew and the estimations of the productive potential of the Haynesville grew, the stocks really took a dive late in the summer. PJ: Are not natural-gas prices tied directly to oil prices? EC: There’s clearly a fundamental relationship, since both are high-value fuel sources. If you’re looking for energy equivalence, roughly 6,000 cubic feet of gas is the same as a barrel of oil. In the U.S., oil is primarily a transportation fuel, where gas is a home-heating and power- MorningstarAdvisor.com 69
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Morningstar Advisor - Fall 2008

Table of Contents for the Digital Edition of Morningstar Advisor - Fall 2008

Morningstar Advisor - Fall 2008
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
Inbox
Are You Preparing for Higher Taxes?
State of Financials
Oracles of Alabama
Investment Briefs
Managers’ Investment Secrets Revealed
Conformity Becomes a Growing Concern at American
Gimme Shelter
Location, Location, Location
Rooted in Buffett, Going for Growth
Keeping Little Company
Away from the Numbers
Consumer Confidence
What about Natural Gas?
TIPS to Beat Back Inflation
Investing in Hidden Assets
Funds That Have an Edge Come Tax Time
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
One for You, 19 for Me
Morningstar Advisor - Fall 2008 - Intro
Morningstar Advisor - Fall 2008 - Morningstar Advisor - Fall 2008
Morningstar Advisor - Fall 2008 - Cover2
Morningstar Advisor - Fall 2008 - 1
Morningstar Advisor - Fall 2008 - 2
Morningstar Advisor - Fall 2008 - Contents
Morningstar Advisor - Fall 2008 - 4
Morningstar Advisor - Fall 2008 - 5
Morningstar Advisor - Fall 2008 - New on MorningstarAdvisor.com
Morningstar Advisor - Fall 2008 - 7
Morningstar Advisor - Fall 2008 - 8
Morningstar Advisor - Fall 2008 - Letter from the Editor
Morningstar Advisor - Fall 2008 - Contributors
Morningstar Advisor - Fall 2008 - Inbox
Morningstar Advisor - Fall 2008 - Are You Preparing for Higher Taxes?
Morningstar Advisor - Fall 2008 - 13
Morningstar Advisor - Fall 2008 - State of Financials
Morningstar Advisor - Fall 2008 - 15
Morningstar Advisor - Fall 2008 - 16
Morningstar Advisor - Fall 2008 - Oracles of Alabama
Morningstar Advisor - Fall 2008 - 18
Morningstar Advisor - Fall 2008 - 19
Morningstar Advisor - Fall 2008 - 20
Morningstar Advisor - Fall 2008 - Investment Briefs
Morningstar Advisor - Fall 2008 - 22
Morningstar Advisor - Fall 2008 - 23
Morningstar Advisor - Fall 2008 - 24
Morningstar Advisor - Fall 2008 - 25
Morningstar Advisor - Fall 2008 - Managers’ Investment Secrets Revealed
Morningstar Advisor - Fall 2008 - 27
Morningstar Advisor - Fall 2008 - 28
Morningstar Advisor - Fall 2008 - 29
Morningstar Advisor - Fall 2008 - Conformity Becomes a Growing Concern at American
Morningstar Advisor - Fall 2008 - 31
Morningstar Advisor - Fall 2008 - 32
Morningstar Advisor - Fall 2008 - 33
Morningstar Advisor - Fall 2008 - 34
Morningstar Advisor - Fall 2008 - 35
Morningstar Advisor - Fall 2008 - Gimme Shelter
Morningstar Advisor - Fall 2008 - 37
Morningstar Advisor - Fall 2008 - 38
Morningstar Advisor - Fall 2008 - 39
Morningstar Advisor - Fall 2008 - Location, Location, Location
Morningstar Advisor - Fall 2008 - 41
Morningstar Advisor - Fall 2008 - 42
Morningstar Advisor - Fall 2008 - 43
Morningstar Advisor - Fall 2008 - 44
Morningstar Advisor - Fall 2008 - Rooted in Buffett, Going for Growth
Morningstar Advisor - Fall 2008 - 46
Morningstar Advisor - Fall 2008 - 47
Morningstar Advisor - Fall 2008 - 48
Morningstar Advisor - Fall 2008 - 49
Morningstar Advisor - Fall 2008 - 50
Morningstar Advisor - Fall 2008 - 51
Morningstar Advisor - Fall 2008 - 52
Morningstar Advisor - Fall 2008 - 53
Morningstar Advisor - Fall 2008 - Keeping Little Company
Morningstar Advisor - Fall 2008 - 55
Morningstar Advisor - Fall 2008 - 56
Morningstar Advisor - Fall 2008 - 57
Morningstar Advisor - Fall 2008 - Away from the Numbers
Morningstar Advisor - Fall 2008 - 59
Morningstar Advisor - Fall 2008 - 60
Morningstar Advisor - Fall 2008 - 61
Morningstar Advisor - Fall 2008 - Consumer Confidence
Morningstar Advisor - Fall 2008 - 63
Morningstar Advisor - Fall 2008 - 64
Morningstar Advisor - Fall 2008 - 65
Morningstar Advisor - Fall 2008 - 66
Morningstar Advisor - Fall 2008 - 67
Morningstar Advisor - Fall 2008 - 68
Morningstar Advisor - Fall 2008 - What about Natural Gas?
Morningstar Advisor - Fall 2008 - 70
Morningstar Advisor - Fall 2008 - 71
Morningstar Advisor - Fall 2008 - 72
Morningstar Advisor - Fall 2008 - TIPS to Beat Back Inflation
Morningstar Advisor - Fall 2008 - 74
Morningstar Advisor - Fall 2008 - 75
Morningstar Advisor - Fall 2008 - Investing in Hidden Assets
Morningstar Advisor - Fall 2008 - 77
Morningstar Advisor - Fall 2008 - Funds That Have an Edge Come Tax Time
Morningstar Advisor - Fall 2008 - 79
Morningstar Advisor - Fall 2008 - 80
Morningstar Advisor - Fall 2008 - 81
Morningstar Advisor - Fall 2008 - Mutual Fund Analyst Picks
Morningstar Advisor - Fall 2008 - 83
Morningstar Advisor - Fall 2008 - 84
Morningstar Advisor - Fall 2008 - 85
Morningstar Advisor - Fall 2008 - 50 Most Popular Equity ETFs
Morningstar Advisor - Fall 2008 - 87
Morningstar Advisor - Fall 2008 - Undervalued Stocks
Morningstar Advisor - Fall 2008 - 89
Morningstar Advisor - Fall 2008 - 90
Morningstar Advisor - Fall 2008 - 91
Morningstar Advisor - Fall 2008 - Most Popular Variable Annuities
Morningstar Advisor - Fall 2008 - 93
Morningstar Advisor - Fall 2008 - 94
Morningstar Advisor - Fall 2008 - New at Morningstar
Morningstar Advisor - Fall 2008 - One for You, 19 for Me
Morningstar Advisor - Fall 2008 - Cover3
Morningstar Advisor - Fall 2008 - Cover4
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