Analyst Note
| Dave Meats, CFA |We are increasing our midcycle price estimate for natural gas after refreshing our views on supply and demand over the next five years. Our updated is forecast is $3.30/mcf, which is higher than our previous forecast of $2.80 but barely over 50% of the current spot price. We believe the shortages that have driven prices to current levels are mainly acute rather than chronic, which means prices will eventually relax. However, we have also identified structural issues dampening the supply response from producers in the low-cost areas that have historically set prices. That means the U.S. supply stack will need to include some higher-cost resources in the next few years to bring the market in balance, and the increase in marginal cost justifies our increased midcycle estimate. The increase will benefit exploration and production firms, even those that traditionally focus on oil and produce gas as a by-product. For this group, a 5%-10% increase in fair value estimates will be typical when the change is incorporated. We intend to do this contemporaneously with our third-quarter earnings updates.