Contrary to the gas supply data and predictions of the federal government, overwhelming evidence supports the view that U.S. natural gas production is falling by more than 2% on a year-over-year basis and is unlikely to reverse itself anytime soon, according to analysts at Raymond James & Associates, who express confidence that gas prices will move back over $5 this winter and remain there into next year.

Noting that “many conflicting data points” indicate the “true direction” of U.S. gas production, analysts J. Marshall Adkins and James M. Rollyson looked at four key issues: the accuracy of the Energy Information Administration (EIA) methodology to estimate production; the quality of gas prospects/drilling efficiency/company; comparisons with Canadian production data; and detailed state production data and related forecasts.

The EIA estimates that U.S. production is actually growing about 2% year-over-year, they noted. “Could this be possible despite the fact that the largest producers (majors and gas utilities) reported the largest decline in U.S. natural gas production last quarter, coming in at down 8.3% versus last year?” They note that incorporating a 12-month moving average, there is a “substantial divergence” between publicly traded data and EIA data beginning in early 2002.

“Not only are U.S. natural gas production revisions for the last 18 months enough to raise an eyebrow at, but the mysterious balancing item estimates and revisions have brought the accuracy of the EIA data under scrutiny for some time,” said the analysts. “Specifically, private company production would have to be growing by nearly 8.5% year-over-year to get close to the EIA data.”

Questioning whether “mom and pops” — smaller producers are “driving a hidden U.S. gas production increase,” the analysts found that this was “highly unlikely.” Even by “generously” assuming similar rig and finding efficiencies, “private” production, which represents about 44% of U.S. production “would be up only about 1.5%, and therefore total U.S. production would still be down over 1%.”

The analysts also found that Canadian production data, which is also trending lower, supports the lower U.S. numbers. “Canadian production has declined steadily since peaking in January 2002 and is not showing any signs of improvement despite the sharp increase in drilling. We think these trends in Canada are probably more telling of what the smaller producers are facing in the U.S.”

State data also matches declining numbers. “Our total estimated production decline from state and federal offshore data, therefore, suggests a year-over-year natural gas production decline of 2.5%, which falls right in line with the reported public company production figures and the rig efficiency estimates.”

Most important for investors, “we believe this type of production decline is likely to continue for the next several years,” said the analysts. “while we may be in the minority, this gives us confidence in our $5+ gas forecast for this winter and next year. Eventually, the market will reward the energy stocks for these very healthy industry fundamentals.”

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