After digging deep into the rig count movements over the past year and considering natural gas guidance from some of the largest publicly traded gas producers, the odds are stacking up against the natural gas bulls, and U.S. output already may have bottomed, analysts with Raymond James & Associates Inc. said Monday.
In the Raymond James 4Q2009 U.S. Natural Gas Production Survey, a team of analysts led by J. Marshall Adkins said the survey “matched up pretty well” with the Energy Information Administration’s 914 data. “In essence, we saw only a slow roll in production during 2009, nowhere near the free fall that many had been calling for. The lackluster drop exhibited in our 4Q2009 production survey results has strengthened our bearish view on 2010 natural gas.”
Considering the “rig count movements over the past year and taking into account production guidance from the largest publicly traded gas producers, the odds are stacking up against the bull case for natural gas,” said Adkins.
Whether output has bottomed may be supported by the recent “loosening trend” in the storage data, “which shows that [excluding weather] we are adding more natural gas to storage than the same time last year,” Adkins noted. “As far as our gas supply model is concerned, we are still (conservatively) estimating ‘normalized’ gas supply falling 1 Bcf/d year/year (y/y) in 2010. Regardless of which U.S. gas supply scenario plays out, it looks like $6 gas is not in the cards this summer.”
The Raymond James analysts have been tracking reported gas production from publicly traded U.S. producers for nearly a decade. The producers comprise about half of total domestic gas production. In their most recent quarterly analysis, publicly traded companies “showed yet another strong y/y gas supply increase of 3.2% (or 1.0 Bcf/d).
“However, we would point out that this growth rate was undoubtedly inflated by a duo of unusual factors: the first (and more significant) being lingering supply disruptions caused by hurricanes Gustav and Ike in late 2008, while the second stemmed from shut-in production/delayed completions being brought back online in late 2009. While readily acknowledging the difficulty and potential error in adjusting for these factors, we would conservatively assume that the ‘cleaner’ underlying supply picture of our production survey comes out to a y/y decline of almost 2% (0.6 Bcf/d).”
On a sequential basis, the Raymond James survey indicated gas production growth in the final three months of 2009 of 1%, or 0.3 Bcf/d.
The data from the publicly traded U.S. gas producers “underscores the fact that U.S gas supply has not fallen anywhere near as fast as many predicted a year ago. More importantly, a surge in both horizontal [drilling] and natural gas rig [activity] over the past six months leads us to conclude that U.S. gas supply is poised to move higher in the coming quarters,” said Adkins and his team.
In another report out Monday, analyst Stephen Smith of Stephen Smith Energy Associates Inc. said the December 2009 data point of EIA data showed a sequential decline in gas production of 0.5 Bcf/d from November.
“This prompted some observers to celebrate this report as ‘bullish’ news,” said Smith. “But of this total Lower 48 onshore decline for December, a total of 84% was either in New Mexico or in Wyoming. This high regional concentration of decline suggests some type of operational problems (such as freeze-offs). Other features of the report also appear less than bullish. for the 11 months ending in October 2009, the average Texas monthly decline was 250 MMcf/d. For the two months ending in December 2009, the average Texas monthly decline was 60 MMcf/d.”
Excluding winter freeze-off effects, which may be in the next two reports, Lower 48 onshore production “appears to have bottomed,” said Smith. “We see good odds that total Lower 48 production will be visibly moving up by the time April EIA-914 production is reported at the end of June.”
Meanwhile, the rig report issued Monday by Tudor, Pickering, Holt & Co. Inc. (TPH) indicated “mixed data” last week with RigData and Baker Hughes Inc. both posting gains of 21 rigs while Smith Bits was flat week/week (w/w)with a gain of one rig.
“With a majority of 1Q2010 data in the books, activity is up 18-20% quarter/quarter (q/q), depending on the source,” the TPH report noted. The RigData gains primarily were oil-directed activity, which gained 17 rigs w/w, while gas-directed activity was down 10 rigs w/w.
By operator type, publicly held exploration and production (E&P) companies added 12 rigs w/w, while private producers added nine rigs. Public operators have driven the majority of the overall sequential activity increase, which is 30% higher, versus a 5% gain by private E&Ps, said TPH.
Regions with the largest activity increases last week were the non-Texas Gulf Coast, the Rocky Mountains’ Williston Basin, and West Texas/New Mexico’s Permian Basin, according to TPH. Each of those regions added six to seven rigs w/w.
Eleven of the 12 regions that TPH tracks have increased 1Q2010 rig activity versus 4Q2009, with South Texas up 41% q/q, driven by the Eagle Ford Shale ramp-up. In the non-Texas Gulf Coast region rig activity has climbed 27%, and in the Permian Basin rig activity is up 26%.
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