For Subscribers

Get the complete article now!

Leading analyst, two experts and and top management from seventeen sector firms examine the natural gas sector in this special 71-page Natural Gas issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info543.htm.

TWST: How important is natural gas in the energy sector as a whole?

Mr. Barone: I firmly believe that natural gas is vital for US economic health. It is the major fuel for residential heating and is also very significant for commercial and industrial heating. More recently, natural gas is becoming an increasingly important fuel for power generation — by far the bulk of new power plants under construction or planned will be gas-fueled. Also, it is a vital building block for the economy as natural gas liquids are used in a myriad of basic products.

TWST: Is the power industry natural gas’ largest customer? Who else do natural gas companies serve?

Mr. Barone: The power industry is not the natural gas industry’s largest customer. The industrial sector is the largest customer and within that classification, major users are the chemical companies, petroleum and coal products companies, primary metals, paper and food. Power plants have not been a large user because the Fuel Use Act was in effect in the late 1970s and 1980s. This legislation basically limited the amount of gas that could be used for industrial purposes, such as power generation. It was not until the early 1990s that the Fuel Use Act was repealed. Over the last few years, power generators have been turning to gas-fired combined cycle generation, due to its short construction lead-time, low construction cost per kW of capacity and comparatively small environmental impact.

TWST: Will power plants continue to rely on natural gas in the future?

Mr. Barone: I believe so, provided natural gas prices remain in a reasonable range. If gas prices remain below 3.5 per million Btu, then natural gas will increase its market share of power plant fuels. If prices are much above 4 per million Btu, demand will be stifled and coal utilization rates will rise. It is really a function of price.

TWST: What other names are you including on your buy list today?

Mr. Barone: I have a “strong buy” on El Paso and a “buy” on Equitable Resources (NYSE:EQT), Kinder Morgan, Inc. (NYSE:KMI) and The Williams Companies (NYSE:WMB).

TWST: How about Williams?

Mr. Barone: Williams owns the second largest natural gas pipeline system in the US. This extensive pipeline system includes Transco, which serves major growth markets. The company also has one of the largest midstream businesses in the industry. Williams significantly increased its exploration and production business with its acquisition of Barrett Resources in 2001 and the company’s production is substantially hedged at very attractive prices. The company also has a significant marketing and trading business that has been highly successful, particularly with long-term structured transactions. Like El Paso and Kinder Morgan, Inc., Williams also has a master limited partnership, Williams Energy Partners (NYSE:WEG), which should also aid the company’s growth (much like the partnerships of El Paso and Kinder Morgan benefit the C-Corp). At current levels, Williams is selling at 10.2 times our 2002 earnings per share estimate and 9.5 times our 2003 estimate with a yield of 3.4%.

This special issue includes:

1) Outlook for Natural Gas - In an in-depth (6,700 words) Expert Interview, David N. Fleischer, Managing Director with Goldman, Sachs & Company and Curt Launer, Managing Director in the Equity Research Department of Credit Suisse First Boston, both examine the outlook for the sector.

2) Outlook for Natural Gas - In an in-depth (2,700 words) Analyst Interview, Ronald J. Barone, Managing Director in the Energy Group of UBS Warburg Equity Research, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of seventeen sector firms examine the outlook for their firm and the sector.