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Raymond James: U.S. Gas Growth Yet to Hit Wall
A modest “re-acceleration” in sequential natural gas supply growth in 3Q2010 doesn’t appear to be slowing down, and in fact implies that gas supplies could jump again in the final three months of the year by as much as 1.5 Bcf/d, analysts with Raymond James & Associates Inc. said last week.
In their 3Q2010 production survey, analysts John Freeman, Cory Garcia and Kevin Cabla said gas supplies grew after a “somewhat surprising slowdown” in the previous quarter. The 3Q2010 production survey indicates that “we could be due for another significant uptick again in September — perhaps even as high as 1 Bcf/d.” And a preliminary review of 4Q2010 numbers suggests “that we’re in store for much of the same, with company guidance implying sequential supply growth of another 1-1.5 Bcf/d…”
The Raymond James trio said they remain “confident that U.S. gas supply growth has yet to ‘hit a wall.'” Some hurdles could create a “sloppy race” heading into 2011, fraught with pipeline/completion delays or a reduced rig count, but “we believe gas supply should come in 3 Bcf/d-plus higher year/year [y/y] in 2011.”
Gas production trends haven’t been smooth since the beginning of this year, noted the analysts. After gaining 1 Bcf/d each month to start the year, gas supplies began to “sputter in April and in fact was essentially flat through July.” The team attributed the slowdown to bottlenecks in takeaway capacity, constraints with hydraulic fracturing (fracking) crews, the Gulf of Mexico drilling moratorium and one-off disruptions with gas processing plants.
However, the analysts still thought U.S. supplies were “far from rolling over.” Their validation came with the release of the Energy Information Administration’s (EIA) August production data, which indicated that U.S. supplies had in fact “gained a second wind, climbing over 1 Bcf/d sequentially” (see NGI, Nov. 1).
For nearly a decade Raymond James has tracked reported gas production from publicly traded U.S. producers, which comprise about half of total domestic gas production as a check on the Department of Energy data. The 3Q2010 analysis “showed another strong y/y gas supply increase of 6.1% or 1.9 Bcf/d,” said Freeman and his colleagues.
The y/y growth rate was artificially inflated by price-related shut-ins (up to 1 Bcf/d) during September 2009, they said. “Thus, a cleaner and much more noteworthy point is the fact that domestic supply is now almost 2 Bcf/d above the peak levels achieved in early 2009, prior to the massive rollover in the rig count (we’re only running about 60% as many gas rigs today).”
Gas supplies for publicly traded producers in the survey grew 1.6% (0.5 Bcf/d) in 3Q2010, preceded by 1.3% (0.4 Bcf/d) in 2Q2010 and 2.4% (0.75 B/day) in 1Q2010. There is the potential for error because the Raymond James survey excludes private producers, which account for nearly half of total production. However, assuming private producers’ output mirrors their public counterparts, as previous Raymond James data indicates, “we would expect the upcoming September EIA figure to reflect a continued growth trend. In fact, our back-of-the-envelope math suggests that September production could be up 0.5-1 Bcf/d.”
The publicly traded independents “continue to carry the load in terms of overall supply growth — posting incredible growth of 10.5% y/y (2.1 Bcf/d) versus a modest decline out of the integrated majors of 1.8% (0.2 Bcf/d).”
Gas drilling activity has shown no signs of slowing down; the rig count is still about 950 rigs. The “choppiness in the supply growth profile has been a reflection of the delays to which the oil patch can actually complete the drilled wells and build the infrastructure…This is heightened further by the shift toward more pad drilling.”
Limited frack capacity has lengthened spud-to-sales times and also “significantly increased completion costs, particularly pressure pumping.” Infrastructure complaints, noted the analysts, are “far more prevalent in the rapidly expanding Marcellus and Eagle Ford plays…”
Even with gas prices below $5/Mcf, “the majority of shale gas plays — let’s just say that every dry gas shale play other than the Marcellus — is unable to generate suitable rates of return.” So why the unwavering rig count?
The Raymond James team believes there are four factors at play. A sizeable portion of “gas” drilling is targeting liquids-rich plays, even though most of the production stream for many of the wells is dry gas. Second, rigs are running to hold leases in several plays. Third, joint ventures are allowing producers to drill on their partners’ money. Finally, a portion of the sustained drilling activity has been propped up by hedging.
“How these factors play out as we head into 2011 will be key in determining the amount of natural gas rigs coming out of the market; of note, we are modeling about 100 fewer natural gas rigs by this time next year,” said the trio. “With that in mind, we continue to believe U.S. supply will remain on a steady climb, implying 3 Bcf/d-plus more production in 2011 versus 2010.”
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