Actual fourth quarter results of the 37 producers covered by the Raymond James energy team indicate that U.S. natural gas production declined by 2.7% sequentially and 6.4% year-over-year, a more aggressive drop than the analysts suspected just weeks ago. “It ain’t pretty,” said analysts in the latest “Stat of the Week.”

Marshall Atkins and his research associate James Mullins, noted that producer surveys are not a “perfect” indication of what’s ahead, but they tend to illustrate the “magnitude of the larger trend to which we preach: natural gas production in the United States continues to decline at a steady pace both sequentially and year-over-year at the tune of 1.0-.15% and 6-7% respectively.”

Actual results typically are lower than the estimates Raymond James receives from the companies, Adkins noted. Also, certain events in “any given quarter” may affect production more or less than a trend, “but it is the overall trend that is important,” he said. “In the fourth quarter, for example, production declined a bit more than ‘usual,’ primarily due to hurricane-related production volume losses.” Maintenance also can skew results, he added.

“That said, production declines in the first quarter of ’03 will most likely return to the more typical 1.0-1.5% sequential, 6-7% year-over-year declines to which we have become accustomed, until drilling activity levels increase substantially.”

Analysts noted that the rig count has been “rather lethargic” until the past month. Since the middle of January, the number of rigs running has increased by 83, of which 44 have been added in just the past two weeks. “We can only hope that this trend continues, but we’re by no means out of the woods yet, which leads us to believe that production will continue to fall at a rate of approximately 1.0-1.5% per quarter for the foreseeable future.”

Activity levels by producers bottomed out in late March and early April 2002, said Raymond James, but exploration and production cash flows and spending “have remained relatively flat until the last few months.” Even if activity levels resume the “feverish pitch” of 2001, analysts said it would take at least three to six months before the new production helped to slow down the natural declines in existing wells.

“While most companies in our survey reported larger-than-normal production declines resultant from the two hurricanes this past season, a handful of companies are experiencing smaller declines as they bring significant new fields online,” said Adkins. “Specifically, the Nansen and Boomvang fields, which lie in the East Breaks area of the Gulf of Mexico and came online in early 2002 continue to affect production declines at Kerr McGee, Ocean Energy and Royal Dutch Shell as the fields undergo further development.”

As to the first quarter returns, Adkins said it was no “big surprise” to expect quarterly production to trend downward. “The number of rigs drilling for natural gas bottomed at the end of March ’02 and activity levels have yet to return to the loftier levels that we saw from mid 2000 through the end of 2001, and clearly far short of the levels needed to overcome natural declines.”

The Raymond James analysts believe that there is little relief expected from the supply side in the near term. “Bottom line, there are going to be quarters with sequential domestic production declines greater than or less than our hypothesized 1.5% rate, but there is no doubt that the trend is a downward-sloping one, and we don’t anticipate it to flatten out anytime soon.”

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