The “steep” natural gas declines in the third quarter of 2001 are “unlikely” to be part of a trend, and so far have not been repeated in fourth quarter reports, according to Lehman Brothers latest exploration and production update. The analyst found that “early returns” from 45 of the largest producers “lead us to estimate that wellhead gas production fell 0.1-0.5%” compared to the third quarter. The analyst also expects a production decline this year to fall between 1.5-2.5%, and import growth and storage to “meet demand growth” in 2002.

Lehman noted that 16 companies produce about one-third of U.S. gas, and so far have reported a drop in fourth quarter gas production of .69% versus the third quarter. However, Lehman’s larger, 45-company sample, which accounts for about 70% of U.S. production, probably will show a .1-.4% production decline.

The analyst also found that storage “will likely be 1.3-1.6 Tcf at the end of winter — well above historic averages of below 1 Tcf.” Because of this amount of storage, “we estimate a 50% chance that Gulf Coast gas prices will fall below $1.75/MMBtu over the next four-six weeks.” Also, “high storage levels could lead to a $2.50/MMBtu ceiling price for natural gas over the next six-12 months.” In the near term, Lehman also said E&P share prices may fall as much as 15-20%, with a discount to recovery to $3.25-$3.50/MMBtu.

Regarding natural gas liquids production, the analyst said that when NGLs are produced, the reported natural gas volumes are negatively impacted by “shrinkage,” and because of this, “an increase in NGL production will lead to lower reported ‘dry’ gas volumes.”

For 2002, Lehman said a “key element in our forecast is an attempt to rationalize the unusually steep production decline in the third quarter.” Because third quarter 2001 volumes were 1.07% lower than its model forecast “no doubt owing to the drilling of a lot of short-lived production over the prior year,” it appears that the lower gas prices in the past few months have “reduced the incentives to drill high-rate wells.” As a result, Lehman’s production model assumes that shallower production decline rates will be “experienced over the next several quarters.”

Companies followed by Lehman analysts that are showing the largest year-over-year drop in production include Murphy Oil, down 23%; Nuevo Energy, down 18%; Unocal, down 16%; Forest Oil, down 13%; Equitable, down 13%; Stone Energy, down 13%; and ChevronTexaco, down 11%. Those with the largest quarter-to-quarter drop included National Fuel Gas, down 20%; Ocean Energy, down 12%; and Unocal, down 10%.

In the good news department, companies followed by Lehman showing the largest year-over-year production gains included Mitchell Energy & Development Corp., up 28%; XTO Energy, up 23%; and Spinnaker, up 22%.

©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.