For the first time in “at least” three years, some of the largest North American exploration and production (E&P) operators that are weighted to natural gas expect to see a “significant production decline,” according to an analysis by Barclays Capital.

Analysts Biliana Pehlivanova and Shiyang Wang earlier this year examined the historical production guidance for 20 of the leading North American E&Ps and found that in aggregate, the total output for the group “routinely” met guidance. Last year, the 20 E&Ps sampled reported a 1.9% jump in gas output year/year, which exceeded their aggregate guidance by 0.4%. Those same operators now are “guiding toward a 4% drop in natural gas output in 2013.”

So the duo decided to take a bigger sample. They reviewed the guidance of 52 producers, which also trended toward production declines this year — at a smaller 0.4% magnitude year/year. This group’s past performance has followed overall domestic output, but the “magnitude” of output have varied.

“In aggregate, our sample group of producers expects their production to lower 4.1% from 2012 levels, or 0.82 Bcf/d,” said the analysts. “While some of the expected production losses are due to asset divestitures, the largest drops are projected by large cap producers that are seeing organic production declines stemming from minimal investment in dry gas assets.”

Barclays sample of E&Ps was “heavily geared” toward larger natural gas-intensive producers “and that perhaps skews the results compared with the overall trend for the country.”

The production decline of 0.4% year/year in 2013 follows a 3.8% increase in 2012, the analysts said. The group also was responsible for 45.4 Bcf/d gross output in 2012 (36.3 Bcf/d net of royalties), about 70% of domestic gas output.

The large caps are forecasting the biggest decline in gas production, with an overall guidance toward a decline of 425 MMcf/d, or 2.2% lower than in 2012, according to the analysis. Production from the large cap E&Ps accounted for more than half (54%) of total output in the Barclays sample for 2012. Mid-cap E&Ps, however, which accounted for 14% of the sample group’s production in 2012, expect to see higher output year/year — up 1.4% after jumping 8.5% in 2012 from 2011.

“The majors in this sample group saw natural gas production declining 2.7% last year and are expected to lose a further 3.3% in 2013,” said Pehlivanova and Wang. “The six producers included in this sample, but not covered by Barclays Equity Research, have been growing production strongly for several years, and are guiding toward 27% growth this year, following a 21% increase in 2012.” This group, adjusted for acquisitions and divestitures, accounted for 6% of the production sample in 2012.

The December 2012 data report from the U.S. Energy Information Administration (EIA) showed a sequential drop in gas output “sooner than we anticipated,” they said (see NGI, March 4). However, the data was skewed by the big impact from well freeze-offs during the month, which rendered the data “unreliable” for underlying trends.

EIA’s December report indicated month/month declines across all reporting areas except for Alaska. “Notably, output dropped in ‘Other States,’ which include Colorado and Utah where freeze-offs took place, but is also a reflection of Pennsylvania’s growing Marcellus production. Pipeline flow data point to continued growth of Marcellus output in the past three months.”

The well freeze-offs have distorted production data for the past two winters, noted the Barclays duo.

“The exact amount of production affected by freeze-offs is difficult to estimate. Unfortunately, with freeze-offs also occurring in January, February and March this year, underlying production trends will be obscured in the next three monthly data releases. While pipeline flow reports provide a more contemporary perspective on current production dynamics, data revisions are not uncommon, and have in the past included a reversal of decline and growth trends. We highlight the uncertainty that freeze-offs pose to reported production data in the near-term.”

An “increasing number of producers” now expect domestic gas output to decline this year, and some are intrigued as to why the declines didn’t appear in 2012.

“They point to a near-halt of industry spending on dry gas targets, and consequent production declines evident in some of the largest producing areas of the country, including the Haynesville and the Rockies,” said the Barclays team. “Others question whether growth of associated gas and the Marcellus can overwhelm production declines elsewhere in 2013, as it did in 2012. While some producers still expect production to grow on an average annual basis, our impression is that there is a broad consensus for a significant slowdown in output, with most producer estimates centered on aggregate U.S. production averaging roughly the same in 2013 as in 2012.”

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