U.S. natural gas production will continue to decline this year, but a fourth quarter survey of 43 domestic producers suggests a more modest decline compared with last year, according to Southwest Securities analysts.
Brian Kinsey and John Gerdes, who conducted a production survey and issued a report last week, said that given a current sustained 900-plus gas rig count and incremental deepwater gas volumes, there will be an approximate 2.5% annual decline, compared with 3.0% in 2003. “The survey has a subtle bearish implication on our gas price thesis, although further supports our long-term price forecast of $4.75/MMBtu.”
The analysts found that U.S. gas production showed a “more modest” sequential decline in the fourth quarter, mostly because of sustained elevated rig counts since June “that should lead to additional gas volume,” as well as nearly 200 MMcf/d of deepwater gas projects that were ramped up during the period.
Deepwater Gulf of Mexico (GOM) comprises about 8% of U.S. gas production, up from 1% in 1996, noted the Southwest Securities team. “Yet, with growth in production comes a greater underlying production decline, both in absolute and relative terms.” The current deepwater GOM production decline rate is about 10%/year, but they said trends suggest that “over the next couple years aggregate deepwater production declines will likely surpass 15-20% per annum as wells begin to contact reservoir boundaries.”
With 2003 deepwater GOM production now at about 3.8 Bcf/d, the analysts said the current decline rate would be about a 0.2 Bcf/d decline. “As the deepwater GOM matures, it will become increasingly difficult to more than offset natural production declines.”
According to its production survey, gas production from new GOM deepwater projects should grow 0.3 Bcf/d this year, in line with a previous survey that indicated 0.2 Bcf/d growth in 2003. “Significant volumes should continue to ramp [up] from projects that commenced in 4Q2003 and, combined with other new startups, should have a net positive impact vis-a-vis the production decline in 1Q2004.”
On the earnings side, the analysts said their survey found that fourth quarter earnings and cash flow estimates for U.S.-based producers are slightly above consensus estimates, but sequentially, earnings per share will be down about 11% and cash flow will be down about 4% from the third quarter. Most of the decline is resulting form an 8% decline in benchmark natural gas prices, the analysts said.
In the earnings preview for the fourth quarter, Southwest Securities reviewed its 14-company universe, which includes some of the largest exploration and production independents in the United States.
While estimates are down sequentially, earnings and cash flow are up substantially compared with the same period of 2002. “Earnings per share for 4Q2003 are forecasted to be improve roughly 28% versus a year ago, and 4Q2003 cash flow per share should increase approximately 20% compared to a year ago, principally due to 10% higher oil and 15% higher natural gas prices.”
Looking ahead, the analysts forecast full-year 2004 earnings will be “modestly less,” with cash flow “modestly higher” than in 2003. “Earnings should fall about 8% principally [as] the result of higher debt, depreciation and amortization, while cash flow per share should grow about 4% as production growth attributes in our coverage universe more than offset 13% lower oil and 11% lower gas prices.”
Production estimates for 2004 are “slightly higher than midpoint of company guidance,” said the analysts. Southwest Securities’ production expectations are approximately 2% above the midpoint of company guidance for 4Q2003 and full-year 2004.
Companies covered by Southwest Securities that are forecast to have positive production gains this year include Devon Energy Corp., 6%; Newfield Exploration Co. and Pioneer Natural Resources Co., 4%; St. Mary Land & Exploration and Magnum Hunter Resources, 3%; XTO Energy, EOG Resources and Cimarex, 2%; and Anadarko Petroleum Corp. and Chesapeake Energy, 1%.
Murphy Oil Co.’s production was expected to be flat, while Burlington Resources Corp. will be down 1%. Apache Corp. did not provide an estimate.
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