North American natural gas producers have the geological resource, know-how, equipment and motivation to grow supplies faster than organic market demand, and with those drivers in place, this year will be a repeat of 2010, Barclays Capital analysts said Monday.
Analysts Jim Crandell, Biliana Pehlivanova and Michael Zenker say Barclays is forecasting 2011 gas prices to average $4/MMBtu.
Some expected a "swift pullback in drilling," but the analysts said they "sensed that there was significant momentum behind well hedged producers, especially in an environment where they were pushed to grow."
In listening to the quarterly earnings conference calls of key independents, "many producers have been pushing production beyond the companies' guidance, driven, in part, by ongoing rig productivity gains. The same factors are in place for 2011; even a slide in prices after the recent winter price rally did not motivate any meaningful change in drilling, in our view."
Investors "still demand a growth story from producers, and producers must oblige," said Crandell and his colleagues. Producers "are being individually encouraged to conduct their operations in a manner that will result in collective over production."
A different business model that focuses on returns "may not be far off...Yet we have heard that the market has been at this turning point before, and we caution investors to not count on a shift in producer actions in the near term."
Barclays analysts expect a "very slow decline in gas-directed drilling" to around 900 rigs by the end of 2011 from the current figure of 911 or so. Many independents are shifting to liquids-heavy drilling, but it "does not appear to be large enough in 2011 to meaningfully affect the 2011 gas supply trajectory, but this could be a factor next year."
Gas supply numbers this year also will be pressured by a repeat of 2009, when there were many drilled but uncompleted wells, said the trio. One reason gas supply did not moderate with the 2009 drilling pullback is that the industry worked off the overhang of drilled but uncompleted wells.
"By our numbers U.S. supply will start the year 4 Bcf/d, or about 6%, ahead of 2010 levels," said the analysts. "Given our rig count and rig productivity projections, supply should grow continuously through 2011, exiting the year 1.4 Bcf/d higher than the start, boosting 2011 average annual production 2.5 Bcf/d above average 2010 levels."
The possibility exists that producers could make a "rig count course correction" this year or in 2012, noted the Barclays team.
"Watch for a shift in one of the incentives or enablers: a push by investors for producers to shift to a business model that does not focus on production growth, more challenging access to capital to fund drilling, and forward prices that are too weak to warrant hedging," they wrote.
There are no signs of any of these factors on the horizon, but "these elements can change quickly," the analysts said. "Barring a clear signal of one or more of these drivers changing by mid-year 2011, prices for 2012 will be the next to come under pressure."
The first producer that lowers production guidance and "whose shares do not trade lower as a result" could lead other producers to "quickly follow suit."
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