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Raymond James: 'Can't Fight Fate' on Growth in U.S. Gas Output

For nearly two straight years U.S. natural gas output has climbed almost continuously -- and 2012 could see even stronger growth, according to the energy team at Raymond James & Associates Inc.

Raymond James analysts, led by J. Marshall Adkins, published their anticipated 3Q2011 production survey on Monday, which is a compilation of data from publicly traded U.S. exploration and production (E&P) companies, which together comprise roughly half of domestic gas production.

The gas surge shows no signs of relenting, Adkins and his team found.

"Since the start of 2010, U.S. natural gas production has climbed by an average of 0.4 Bcf/d per month -- though, admittedly, this growth has been far from linear," said the analysts. "In fact, we've seen two instances where U.S. gas supply growth stalled out over an entire five-month time span, only to kick back into gear and continue the trend higher.

"Given the recent growth stagnation, the calls from the 'supply rollover pundits' appear to be picking up once again, with many believing that the third time is the charm. Once again, we feel reluctantly inclined to kick the natural gas bulls off their pedestal and proclaim, 'Not so fast, my friends!' Based on our recently completed survey of publicly traded operators for 3Q2011, we now believe that the Energy Information Administration's (EIA) next release of its monthly 914 U.S. gas supply data (on Nov. 29) should show a significant upward spike in the September gas supply figure - to the tune of plus-1 Bcf/d more than August."

The analysts noted that the U.S. natural gas rig count peaked more than a year ago in August 2010 and continues to drift slowly lower, but output continues to be stronger than expected.

The "squirreliness" of last winter -- wellhead freeze-offs, slowdowns in activity and pipeline delays -- appeared to muddy the underlying U.S. gas supply growth curve. However, analysts still are placing bets that domestic supplies will jump by 4-5 Bcf/d in 2012 based on public E&P company data that they compiled for 3Q2011.

"We believe that there are a number of underlying supply trends that the 'supply rollover pundits' are simply not factoring into their models now that the gas rig count has finally begun to move lower," Adkins and his colleagues wrote. "The biggest one is the fact that there are a bunch of horizontal oil wells being drilled today that are producing way more associated gas (most more than five times more productive) than the average vertical gas well drilled just five years ago. Remember, we are not even counting these as gas wells!"

For more than a decade the energy team has tracked reported gas output from U.S. producer as a "fact check" on EIA 914 data. The 3Q2011 survey confirmed that publicly traded producers have resumed an "upward growth trend," indicating a sequential gas supply increase of 2.3%, or 0.75 Bcf/d, from 2Q2011.

Based on the September data by itself -- the third quarter ended Sept. 30 -- data points to "a significant upswing in gas supply" ahead of the EIA-914 September report, which is expected within a few weeks.

Assuming that private producer growth trends mirror their larger peers, which analysts said always has been the case, the upcoming EIA figures should reflect a "significant bounce back in U.S. gas supply after several months of flat-lining."

Based on the analysts' calculations, September output could be up 1 Bcf/d from August.

The sharp climb in output isn't the first time that pipeline constraints and/or weather had muddied a few months' worth of underlying supply growth, said the analysts. And it won't be the last.

Specifically, the Raymond James gas storage model indicated that the domestic gas equation went from 1.5 Bcf/d "looser" (more gas in the system) in August to about 2.5 Bcf/d plus looser in September year/year.

"The continued gas production growth is also supported by industry pipeline flow models. Ultimately, we continue to believe that the underlying growth trend for U.S. supply remains intact -- even with the slow bleed in overall active gas rigs and the washout in offshore gas supply."

Most important, the new data appears to indicate that domestic gas output will jump by more than 4 Bcf/d -- 6% or higher -- in 2012.

The analysts acknowledge that U.S. gas supply growth will moderate eventually but "we continue to believe that industry can still grow gas production with less than 700 active natural gas rigs" versus around 900 active today.

Raymond James' public company data suggests that the September EIA-914 data will be "unfortunate" for gas prices. The U.S. gas market likely will be 2-4 Bcf/d oversupplied this winter, "which means gas prices will find it very difficult to break above $4/Mcf."

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