Raymond James & Associates Inc.'s 2Q2012 U.S. natural gas production survey confirms an "upward growth trend among publicly traded producers," which indicated another sequential supply increase of 0.49% (0.17 Bcf/d), or 7% year/year (2.45 Bcf/d).
The survey, which was published last week, did not include the impact of shut ins, which are estimated to be about 0.22 Bcf/d for the quarter, said analysts J. Marshall Adkins and John Freeman. After taking into account the latest Energy Information Agency (EIA) 914 data for June, which indicated a decline of 0.18 Bf/d, "this compares favorably to the...growth rate of 0.3%," the analysts said (see related story).
For more than a decade Raymond James analysts have tracked reported natural gas output from publicly traded U.S. producers that together comprise roughly half of the total domestic gas output in the country. The figures act as a "fact check" on the EIA 914 data, and Raymond James' compilation has been a near mirror in tracking underlying supply trends.
As Adkins and Freeman pointed out, in some cases as in early 2009 they had front-run broad-based revisions and/or trend changes in EIA gas supply data. "It took long enough, but we finally saw the economic reaction to low natural gas prices beginning in October," wrote the duo. "Since then, the market has shed 300 horizontal gas rigs, 440 total gas rigs, and continues to 'whack them.'"
The trend, said the analysts, "has gone from 'grow, grow, grow' to 'moderate, moderate, moderate.' Considering that we've dropped over 440 gas rigs in less than a year, all we can say is that it's about dang time. We're still projecting y/y growth of 4 Bcf/d in 2012, but we've lowered our 2013 y/y growth outlook to just 0.5 Bcf/d, down from 2 Bcf/d previously.
"Interestingly, we're still projecting gas production growth through 2014 and although it's very marginal growth, we believe that is a testament to both drilling efficiencies and the impact of associated gas from the oil plays."
However, "it could take further serious reductions in the rig count before we start to see supply rollover. In fact, we don't see supply actually declining until 2015!" Why? The reasons, they said, are "three-fold": an uncompleted well inventory, primarily in the Marcellus Shale, where both economics and growth are most robust will continue to offset declines; liquids and oil-rich drilling will continue to "spit off" a lot of associated gas for the foreseeable future; and rig productivity in the past five years has been "unparalleled" in industry history.
"Better rigs, pad drilling and improved completion techniques are just a few of many items that are making the oilpatch more efficient at getting resources out of the ground," wrote Adkins and Freeman. "That being said, we don't expect the industry to take any steps backward, nor should the market."
Incomplete data on a few plays kept the Raymond James team from fully discussing 2Q2012 findings or the 1Q2012 findings on the Marcellus Shale. However, based on the data verified to date, "the numbers have been right on cue sans the Haynesville, which is likely attributable to higher-than-expected shut-ins from the play."
Although they didn't include the Marcellus in their calculations, the analysts said they were sure that growth from the region had "rivaled the 2009-2011 growth seen out of the Haynesville and expect the play to be the "King of the Gas Shales" by 2015 at the latest. "Much of the current constraints from an already rampant growth rate have been on the infrastructure side, which is reasonable given the play's large aerial extent. However, this type of constraint is likely just a near-to-medium term issue that should be resolved by 2015 as well."
Onshore oil production also has remained "robust," said the analysts. According to the survey, output was up 800,000 b/d in 2Q2012. The Gulf of Mexico was a "drag on growth" during the quarter and "will be again in 3Q2012 due to the shutdowns related to Hurricane Isaac. "Accordingly, we've tweaked our assumptions for the Gulf, in addition to updating our production by play estimates. We are now forecasting full-year 2012 and 2013 oil production of 6.394 million b/d (736,000 b/d of growth) and 7.246 million b/d (852,000 b/d of growth)."
Meanwhile, Canaccord Genuity is maintaining a gas price forecast of $3.50/Mcf for 4Q2012, with prices gaining 50 cents in 2013 and then moving to $5.00 for the long term, analysts said Friday.
"We remain comfortable with these estimates, and note our 2013 estimate is 80 cents above the current futures strip," said analyst John Gerdes. "Even though U.S. onshore gas well/rig productivity appears to be stabilizing, we believe gas production related to oil-directed drilling should increase from 20% of recent gas production growth to 65% in '13. Accordingly, robust growth in associated gas supply should limit the need for an appreciably higher gas rig count and thus lowers the probability of natural gas prices materially exceeding our forecast the next few years."
"We believe the gas market has tightened from 1 Bcf/d oversupplied at year-end 2011 to 2 Bcf/d undersupplied," Gerdes said in a note. "Should this imbalance be maintained, the year/year (y/y) storage surplus would decline 120 Bcf by Nov. 1 and storage would peak at 4,072 Bcf." Canaccord Genuity's Nov. 1 forecast is for 4,081 Bcf, which "embeds some conservatism relative to recent fundamentals. This we believe is internally consistent as we project gas prices to rise to $3.50 in 4Q2012, which should unwind the coal-to-gas switching experienced thus far this year."
Gas storage entered the cooling season this year 900 Bcf above year-ago storage levels and "should enter the heating season only 275 Bcf above year-ago levels," said Gerdes. "Our peak storage estimate is just below demonstrated working gas capacity of 4.1 Tcf. Additionally, storage capacity should increase 0.1 Tcf this year."
With gas prices rising, "coal should claw back" some of the losses from switching, but coal still faces a decline and hydroelectric generation should fall from last year's levels, he said. Gas-fired power generation is forecast to be up 4.5 Bcf/d this year. In 2013 gas storage should remain "elevated by historical standards" with a return to 2011 price levels of around $4.00/Mcf, which would induce a "reversion in this year's fuel switching gains, leading to a decline in gas-fired power demand. Further, we expect continued robust gas supply growth associated with oil-directed drilling."
Over the long-term, Gerdes and his team are maintaining a $5.00/Mcf gas price outlook because "the marginal cost of supply outside of the Marcellus Shale likely requires a $5 price, though we admit the estimate has modest downward bias." The biggest risks to the Canaccord Genuity forecast, said the team, include "higher than projected oil directed-drilling activity and a further meaningful increase in U.S. gas well/rig productivity." In 2014, based on a $5.00 gas price environment, "we expect a reversal in the remaining third of nonstructural coal-to-gas switching experienced from '09 though '11."
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