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Raymond James: Lack of Rigs, Prospects to Constrain U.S. Gas Market for Years

Adjusting for the hurricane-related production deferrals last fall, 4Q2005 U.S. natural gas production would have been up for the first time in years, Raymond James' analysts said last week in the latest "Stat of the Week." However, a lack of rigs, higher decline rates and a slowing in efficiencies likely will constrain the supply picture for years to come.

Analysts J. Marshall Adkins, Wayne Andrews and Pavel Molchanov noted the final quarter of 2005 saw a huge 5.9% drop in U.S. gas production from publicly traded companies. However, most of the decline followed the deferrals from hurricanes Katrina and Rita. "If we try to remove the hurricane impact, it appears that U.S. gas production would have been up for the first time in years," to around 1.2%.

However, achieving a gas-production positive by the end of 2005 took immense effort from the industry, the analysts noted.

"The industry is now at virtually 100% utilization of onshore gas rigs, and gains in rig counts and drilling efficiencies have also been significant over the past three years. Going forward, constraints in rig availability are likely to become more pronounced, and gains in efficiencies should slow at the same time that higher decline rates begin to kick in, and prospect quality continues to fade. This means that the U.S. gas supply picture remains quite constrained for years go come."

Raymond James' long-term bullish North American energy thesis remains intact. "Much like in the 1970s, when oil production continued to stagnate, regardless of how many rigs were drilling, we think we are at a similar crossroads in the U.S. gas supply picture." As the storage surplus recedes moving into 2007, "we would expect U.S. gas prices to rebound back to the traditional 6:1 BTU parity with crude oil, and potentially even higher, depending on the weather. While short-term gas prices and oil/gas price ratios will continue to be volatile, if oil prices remain near the $60/bbl level, this would imply fair value for gas around $10/Mcf."

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