From the October 2010 issue of Research Magazine • Subscribe!

Energy: Heating Up

Solid total returns and the prospect of an improving economy continue to fuel energy stocks.

Ronald J. Barone
UBS
212-713-3848
ronald.barone@ubs.com

Southwest Gas Corporation (SWX) realized recurring 2Q10 EPS of $0.06 (excluding $3.6 million in corporate owned life insurance policy charges), surpassing our $0.02 EPS estimate and the Street's $0.03 loss-per-share consensus estimate. Better than anticipated construction services performance and lower than expected depreciation expense largely drove the EPS beat.

Incorporating 2Q results, lower anticipated depreciation, and lower expected debt costs, we are lifting our 2010-2012 EPS estimates to $2.22, $2.26, and $2.55, from $2.17, $2.23, and $2.47, respectively. We note the rate design improvements SWX has recently achieved in Nevada and California (decoupling) and highlight management's continued focus on such relief in Arizona. We maintain our $36 DCF (discounted cash flow) derived price target and Buy rating on the shares.

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Ronald Londe
Wells Fargo Securities
314-955-3829
ron.londe@wachovia.com

Natural Resource Partners L.P. (NRP) reported Q2 2010 results that were well above our estimates as average coal royalty per ton and total coal production was above our expectations. Also, revenue from other operations such as coal processing fees, oil and gas royalties, and non-recoupable minimum payments were better than expected.

We are increasing our valuation range for NRP to $26-28 from $23-25. This increase is based on Q2 2010 results, an improved outlook for the coal markets, recent acquisitions, solid liquidity position and an increase to our distribution growth estimates.

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David Deckelbaum
UBS
212-713-6138
david.deckelbaum@ubs.com

Cimarex Energy Co. (XEC) reported 2Q10 diluted EPS/CFPS (earnings per share/cash flow per share) of $1.46/$3.03 which was shy of our $1.50/$3.10 and consensus of $1.49/$2.98. Production of 594.4 MMcfe/D (millions of cubic feet equivalent per day) was pre-announced on July 27th and was up 3 percent sequentially and realized pricing of $6.75/Mcfe (thousand cubic feet equivalent) was in line [with expectations]. As cash flow/Mcfe was 1 percent better than expected, the miss was on a higher than expected share count, partially influenced from equity issues to convertibles at 2Q end.

XEC raised production guidance for 2010 to 585-605 MMcfe/D representing 30 percent annual growth at the midpoint and a 4 percent increase from prior guidance. 3Q10 guidance of 585-615 MMcfe/D calls for roughly 4 percent growth sequentially, which should be easily achieved given Permian rig ramps from 5 to 12 and the inclusion of approximately 2.5 millions of barrels per day of lost volumes in 2Q due to pipeline maintenance. Valuation: $82 price target maintained.

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Pavel Molchanov
Raymond James & Associates
800-248-8863

With macroeconomic factors having been the No. 1 driver of oil prices over the past two years, recent price volatility has been largely a result of the European fiscal crisis and resulting currency swings, along with mixed economic data points from China and increasingly bearish data points in the U.S. On the supply side, non-OPEC supply -- which we believe is essentially at its peak -- is likely to start exhibiting declines, especially when the Gulf of Mexico deepwater drilling moratorium is taken into account.

This should be seen against the backdrop of what we estimate is limited excess production capacity in OPEC countries - a stark contrast to the IEA, which takes OPEC's "official" 5.83 MMBbls/d spare capacity estimate at face value. The risk of a limited buffer of excess capacity is further heightened by the risk of potential geopolitical supply disruptions.

Our current 4Q10 forecast is $80/Bbl, followed by $90/Bbl for full-year 2011.

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