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Raymond James: How Does $3 Gas Taste?

Even with wellhead freeze-offs that cut into U.S. natural gas production in February, domestic output still will be up by an average 4-5 Bcf/d year/year (y/y) in 2011, the Raymond James & Associates Inc. energy team said Monday.

However, without the weather-related shut-ins, "we think the U.S. natural gas supply would have been up over 5 Bcf/d," wrote J. Marshall Adkins and his team.

Last year domestic gas output was an average 0.5 Bcf/d higher every month, or more than 2 Bcf/d y/y, the analysts noted. However, the upward trend was interrupted in February when harsh winter weather slammed into Texas and the Midcontinent, leading to wellhead freeze-offs. As much as 5 Bcf/d of gas output was shut in at times because of below-freezing temperatures, Adkins noted.

The Raymond James estimate jibed with the Energy Information Administration's (EIA) 914 data, which recently confirmed a sequential drop-off of 1.3 Bcf/d in February from January (see Daily GPI, May 11). Using the EIA data and then the results from their recent 1Q2011 gas production survey, the analysts concluded that all of the short-term gas production reductions were weather-related.

"After compiling the domestic production data from publicly traded producers, we expect to see a sequential jump in March [EIA] 914 natural gas supply of 2.0-2.5 Bcf/d," wrote the analysts. "This uptick has been largely confirmed by pipeline flow data."

Because the continued uptick in domestic gas production "will likely show itself later this summer, we must ask: How does $3 gas taste?" said Adkins and his colleagues.

Raymond James has tracked reported gas production from publicly traded U.S. producers as a "fact check" on EIA 914 data for more than 10 years. The data "has been particularly accurate in tracking underlying supply trends -- and even in some cases (early 2009) allowed us to front-run broad-based revisions to the...data," the analysts noted.

Meanwhile, U.S. gas supplies have continued to eke out gains "despite the widespread freeze-offs and weather-related slowdowns during the most recent quarter," noted Adkins and his team. "Are we worried about a rollover? Not anytime soon. Assuming that private producer growth trends mirror larger publicly traded peers (which history has shown to be the case), we would expect the upcoming March EIA-914 figure to reflect a significant bounce back in U.S. gas supply...

"In fact, our back-of-the-envelope math suggests that March production could be up 2.0-2.5 Bcf/d sequentially."

The y/y comparisons are set to "become easier as we move through the summer given that U.S. supply essentially flat-lined from April to July [2010]," said the Raymond James team. "We noted during that time that this slowdown in the overall growth curve was likely due to bottlenecks in takeaway capacity, constraints with [hydraulic fracturing] crews, 'moratorium' maintenance in the Gulf of Mexico and some other one-off disruptions and delays with gas processing plants."

However, assuming the analysts' data is correct and underlying supply growth continues its upward movement for the rest of the summer, the "y/y supply numbers will look increasingly looser (or more bearish)." The EIA is projecting total marketed gas output to jump by 2.3% (1.4 Bcf/d) in 2011.

The public independents, as they have before, continue to carry the load in terms of overall supply growth, "posting incredible growth of 10.2% y/y," or 2.1 Bcf/d. However, the independents and the integrated majors account for only half of overall U.S. gas production.

Raymond James data excludes private gas producers and "this provides the potential for significant error," said the analysts. However, "it has been our experience over the years that the production trends from privates tend to track public independents fairly closely." The "real kicker" in the trends is the horizontal rig count, with the privates up 175%-plus since June 2009 versus a 63% uptick out of publicly traded peers.

The domestic gas rig count peaked last August and is heading lower. However, said Adkins, "we believe that the industry can grow gas production with less than 700 active natural gas rigs," versus 875 active today.

Baker Hughes Inc. reported on Friday that domestic gas-directed activity declined week/week (w/w) by 14 rigs to 874. The area reporting the largest gas-directed rig decline was the Haynesville Shale, which was down eight rigs and is now 55 rigs off its 2010 peak, with 18 fewer rigs year-to-date.

Canaccord Genuity analysts said in a note Monday the w/w tumble in the U.S. gas rig count was the largest since mid-March "and the lowest absolute level of gas-directed drilling activity since January '10. Gas drilling now accounts for less than 48% of total U.S. drilling activity, a composition last seen over a decade ago."

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