Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Monday, February 25, 2008 11:51 AM

I have written about EOG Resources before. It has the best name change ever to its credit, having been Enron Oil and Gas, but it's also one of the premier natural gas plays in the market today. It's at a 52 week high right now-well over in fact at $103- but I feel it is still attractively priced. There was an article in Barron's over the weekend that mentioned a little known oil play in North Dakota called the Bakken Shale. EOG is a major participant in this area. The field has yet to be fully delineated, but something with this potential is what EOG needs.

The stock has done well on the strength of its success in the Barnett Shale play in and around Fort Worth, Texas. They still have years of drilling ahead of them in this area, but to get a premier valuation, an energy stock has to have multiple follow on opportunities. The Bakken might be that opportunity.

Also, the price of natural gas has been very strong. I mentioned before that the heat equivalent between gas and oil is 6 to 1. If oil is close to $100, that would imply natural gas should sell for about $16 per mcf. The 10 year average price exchange is closer to 8 to 1, implying a fair value of around $12. Gas closed Friday at $9.15 and the February 2008 contract was at $10.19. This morning, Morgan Stanley raised its price forecast to $8.50 for this year and said the consensus was $7.63. I think both are too conservative, but the stock is trading as though gas was even lower than these guesstimates.

Sustained cold has caused the price of gas to rise, but from a bigger picture view, the decline in Canadian gas imports is of more importance. I don't think Canada will be able to increase its flow of gas to the U.S. because of lack of drilling and an increase in their own domestic demand. There has been a lot of talk about imports of Liquefied Natural Gas (LNG) but the cost and complexity of building facilities for such imports is environmentally daunting, expensive, and not likely to happen soon.

As an aside, the price of gas is in "contango" with the further contract price richer than the near one, but the price of oil is still in "backwardation" since the near contract is more expensive. I think the price of oil corrects a bit, but the price of gas might stay strong.