Stronger than expected U.S. onshore production growth, elevated Canadian imports and high storage levels led another energy analyst to cut natural gas prices for the second half of 2007 — this time by $1/MMBtu.
SunTrust Robinson Humphrey/the Gerdes Group (STRH) dropped its gas price forecast to $7/MMBtu from $8. The analyst now expects 3Q2007 prices to be $6.50/MMBtu, with 4Q2007 prices at $7.50. Gas prices also were reduced by 50 cents for 2008 to $8.50/MMBtu.
STRH’s revised outlook follows Raymond James & Associates Inc.’s assumption that there is a “reasonable chance” that U.S. gas prices could fall to $5/Mcf or lower over the next two months (see NGI, Aug. 6). EOG Resources Inc. Mark Papa also told analysts earlier this month that gas prices likely will be “disappointing” in the last half of the year (see NGI, Aug. 6).
STRH analysts John Gerdes and Michael Dane said onshore U.S. gas production “has displayed surprisingly strong growth given the slower growth in gas rig count.”
“After the weather-related weakness last winter, onshore U.S. production through May of this year has increased roughly on trend with the growth experienced last year,” wrote Gerdes and Dane. However, the continued rise in U.S. onshore growth in gas volumes has come against a slower growth in the gas rig county.
“Since the beginning of the year, Texas has constituted almost 90% of the growth in onshore U.S. production, while states other than the main gas-producing states (i.e., Wyoming, Oklahoma, Louisiana, New Mexico) largely comprise the remainder,” they said.
The Barnett Shale in Texas appears to have slowed the deterioration in U.S. new well productivity to 5% from 6% a year.
“Notably, over the past decade including last year, U.S. new well productivity has deteriorated fairly consistently at [more than] 6% per annum,” said the STRH analysts. “Consequently, we have lowered our assumed productivity deflator to 5% per annum through 2009, while maintaining the long-term trend of 6% per annum thereafter given the more advanced stage of Fort Worth Barnett Shale development.”
Long-term, they said, the North American E&P industry should require more than $9 gas prices to increase drilling activity enough to maintain gas supply.
“Given that the E&P industry is 15-20% free cash flow negative in a mid-$7 gas and mid-$60 oil price environment, markedly higher gas prices seem necessary to meaningfully increase drilling activity to maintain North American gas supply. Notably, the E&P industry currently requires almost $9 gas and $70 oil prices to generate sufficient cash flow to fund capital outlays.
STRH’s forecast of $8.50 natural gas prices in 2008, and up to 10% U.S. oilfield service deflation this year, “appears necessary to provide the financial incentive to increase the U.S. gas rig count from 1,475 rigs this year to 1,575 rigs in 2008. In Canada, $8.50 gas prices next year, and up to 20% oilfield service cost deflation this year, should justify a 10% rebound in Canadian gas-directed drilling in 2008 after a 25% decline in 2007.”
Long-term, liquefied natural gas (LNG) “is likely to be the incremental source of gas supply growth to the U.S. market,” said Gerdes and Dane. “..the projected growth in natural gas supply available to U.S. consumers is largely attributable to LNG import growth” because projected North American supply should remain fairly static — stronger in the United States and weaker in Canada.
STRH is forecasting that even with the start-up of the deepwater Independence Hub, Gulf of Mexico (GOM) production will be about 0.5 Bcf/d lower in 2007. GOM volumes in the past year “continued to erode along with the offshore rig count.” Assuming the new hub achieves full production by the end of the year (1 Bcf/d), GOM gas production in 2008 “should approximate 2007.” They are assuming the GOM rig count will average 80 rigs next year; year-to-date, the rig count has averaged 78 rigs.
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