U.S. natural gas production fell an estimated 0.4% sequentially in the first three months of the year from 4Q2006 and was up 2% year-over-year, according to data compiled from public companies by Raymond James & Associates Inc. However, nearly all of the year-over-year increase came from the rebound following 2005 hurricane-related deferrals -- actual output fell 1.7%.
The analysis nearly mirrors one by SunTrust Robinson Humphrey/the Gerdes Group, which reported U.S. gas output declining 0.2% sequentially in 1Q2007 from 4Q2006 (see Daily GPI, May 17). The data also generally supports the Energy Information Administration's numbers from recent quarters, although it has yet to release full 1Q2007 figures. Raymond James has been publishing U.S. production results of public companies for the past five years.
"If we try to remove the hurricane impact, it appears that the true underlying U.S. gs production would have actually been down 1.7% year-over-year without the hurricane impact last year," said Raymond James analysts J. Marshall Adkins, Wayne Andrews and Pavel Molchanov. "This substantial, albeit imprecise, decline appears to mirror the organic declines that have characterized U.S. gas production during 2002-2005."
More important, said the analysts, "all of these declines have come amid virtually 100% utilization of onshore gas rigs, along with significant gains in rig counts and drilling efficiencies over the past four years."
Raymond James' survey covers about 55% of total U.S. gas production, and the results "are not necessarily reflective of the other 45%," said analysts. Most of the producers not surveyed are "smaller, mostly privately held E&P companies."
"Given the vast number of these small players, it is difficult to get an accurate assessment of what their production is doing," said Raymond James analysts. "However, we do know that over the past 12 months, the number of gas rigs among private companies not included in our survey rose only 7%, less than the 14% increase among public producers..."
Exploration and production (E&P) budgets issued in recent months suggest there will be growth in North American drilling this year (see Daily GPI, May 15; May 1), but the drilling expansion won't match the rates of the previous two years, analysts noted. Raymond James also is forecasting that gains in efficiencies "should slow at the same time as field decline rates continue to trend higher and overall prospect quality continues to diminish."
The analysts believe the U.S. "gas story" is similar to the 1970s "oil story, when U.S. oil production continued to stagnate despite greater and greater numbers of active drilling rigs."
In the last six months of this year, Raymond James expects U.S. gas prices to rebound to "at least" 7:1 parity with crude oil, or potentially 6:1 or higher, depending on the weather (see Daily GPI, May 17).
The decline in U.S. gas output "should not be viewed as an immediate catalyst for gas prices," said analysts. However, "since this year's growth in rig activity is likely to be slower, even steeper underlying production declines should materialize by the end of 2007 -- shifting the market's perception about U.S. gas supply and providing added support to drive gas prices higher in the latter half of the year."
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