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Publicly Traded U.S. Gas Producers Lift Output 3.5% in 4Q2008

Publicly traded U.S. natural gas producers continued to show gains in 4Q2008, boosting output by 3.5% year/year (y/y), despite disruptions from hurricanes Gustav and Ike, a survey by Raymond James & Associates Inc. has found.

The analysis by Raymond James' John Freeman, Kristal Choy and Cory Garcia showed remarkable growth by domestic gas producers in late 2008, which followed the record-setting pace in 3Q2008. Adding back the estimated offshore hurricane-related shut-ins reported by the Minerals Management Service in 4Q2008, and assuming 65% was attributed to large, publicly traded producers, gas output jumped y/y "a staggering 8%," said the trio.

The Raymond James survey covers about 50% of total U.S. gas production, and the results, said the analysts, may not reflect the other half, which mostly consists of smaller, privately held exploration and production companies. To generally assess where gas output is trending, the analysts subtracted out the volumes reported in industrywide production data from the required Energy Information Administration Form 914 data.

"Using this methodology, which we readily admit is imperfect, we believe that private operators grew production by about 7% during 4Q2008," said the Raymond James team. "This growth comes in the face of an approximately 25% decline in the private operators' rig count from September until year-end."

The 4Q2008 figures imply onshore growth "is stagnating (and rightly so)," said the analysts, but "we are still months from realizing just how fast (and far) production could fall. Hint: Look to summer before supply actually becomes tighter on a year-over-year basis."

As has been the case in previous surveys, the publicly held independents continued to drive a sizable portion of the overall growth in 4Q2008 -- increasing gas production by 9% y/y, according to the analysis.

"Importantly, production from the private producers (and smaller public players that we do not include in our production survey) continues to play a far more significant role in the supply picture, posting an estimated y/y growth of 7% during the quarter," said Freeman and his colleagues. "For the majors, on the other hand, this quarter provided further evidence of the group's downward trend in production, with volumes down 7% y/y -- partly a function of their much higher focus on deepwater and/or international projects."

A handful of the larger onshore gas producers drove the group's quarterly growth, the survey found. Without the "impressive organic growth" from Chesapeake Energy Corp., EOG Resources Inc., Petrohawk Energy Corp., Ultra Petroleum Corp., Williams and XTO Energy Corp., the surveyed group's nominal (including hurricanes) y/y growth "would not have been 9.0%, but rather 5.2%."

As it has for several months, the Raymond James energy team continues to see more downside to gas prices "heading into the seemingly certain scenario of production shut-ins this summer. Historical precedent -- the pullbacks of 1997-99 and 2000-02 -- has shown that gas-weighted stocks bottom very close to the floor in gas prices. While this may not seem like an altogether earth-shattering revelation, it is precisely the reason we remain bearish on the group in the near term."

"We believe that not only are we headed to sub-$3.00/Mcf gas prices, but that consensus earnings estimates and rig count forecasts have further room to fall."

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