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Raymond James: Summer Shut-ins May Total 500-750 Bcf

The winter heating season is now ended, but the natural gas market still is oversupplied by more than 4 Bcf/d on stagnant demand and strong year/year supply growth -- meaning more shut-ins this summer and deeper declines in gas prices, Raymond James & Associates Inc. said in an energy outlook.

"We believe total shut-ins this summer may total 500-750 Bcf, and natural gas prices would need to fall well below $3/Mcf to make this happen," said analysts. "Moreover, this assumes only a very small increase in liquefied natural gas (LNG) imports. Should imports climb substantially, the amount of shut-ins this summer could rise dramatically."

For 2010, the outlook is still hazy.

Huge reductions in the onshore gas rig count should help U.S. gas prices by 2010, "but it is still too early to get excited about 2010 gas prices," said the Raymond James team. "As such, we cautiously reduced our 2010 natural gas forecast to $6.00/Mcf, while waiting to get more data on the magnitude of the supply rollover, any potential rebound in demand, and a better feel for a potential tsunami of LNG that could wash up on U.S. shores."

The analysts are "extremely bearish on natural gas prices through the summer and accordingly suggest minimal exposure to North American, gassy-weighted names. Our rig count forecast currently calls for 1,200 rigs to be laid down from the peak, or a 60% peak-to-trough decline, and may prove conservative. This should put heavy pressure on pricing and utilization for land drillers, pressure pumpers and workover companies in both 2009 and 2010."

For exploration and production (E&P) companies, the 2009 mantra is "cash is king," said the Raymond James analysts, echoing similar comments issued last week by Moody's Investors Services (see related story).

"The current operating environment is about as bad as many E&P executives have seen in their careers (and many of them remember the days of sub-$10 oil)," said the Raymond James analysts. "E&P economics on all but the top-tier prospects (Marcellus, Haynesville, etc.) are now pretty marginal, and it's no surprise that capital budgets are being slashed across the board, sometimes by more than 80% from last year's levels.

"Living within cash flow is the name of the game nowadays, and many companies were at pains to accentuate their fiscal conservative credentials (if only we had some of that in Washington). Indeed, even for companies that may want to outspend cash flow, the current state of the credit and capital markets means that it's often not feasible. The likelihood of potentially hefty cuts in borrowing bases during this spring's redeterminations means that preservation of liquidity is a key objective for E&P management teams."

Despite all of the naysaying, it's not all doom and gloom, said Raymond James.

"Some of the larger operators with 'dry powder' on their balance sheets are on the prowl for distressed assets that they could pick up on the cheap," but the analysts admitted there's not too much merger and acquisition activity materializing yet. "More broadly, companies are positioning themselves for a commodity rebound down the road, hence the advantage of preserving financial flexibility."

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