On the heels of Chesapeake Energy Corp.’s spending cutbacks over the next two years (see related story), Raymond James & Associates Inc. Monday once again cut its projected U.S. rig count, predicting a reduction of 41%, or 850, for 2009.

Raymond James in early October predicted that a gas floor of $7/Mcf “could easily be breached” if the rig count wasn’t severely cut in 2009 (see Daily GPI, Oct. 10). Two weeks later the analyst once again cut its rig forecast, predicting it would fall more than 10% year/year (y/y) in 2009 and drop off 12.5% y/y in 2010 from 2009 (see Daily GPI, Oct. 21).

The energy analyst’s rig forecast was substantiated by other analysts over the past two months. Stephen Smith Energy Associates in late October predicted that the U.S. rig count would decline by 25-30% before a new supply/demand equilibrium was established (see Daily GPI, Oct. 30). Barclays Capital in November also said the rig count would drop to 1,250-1,300 until at least the second half of 2009 (see Daily GPI, Dec. 1).

Now Raymond James analysts think their first two forecasts were too low.

“Specifically, we now think there will be a 47% (or 750-rig) reduction in the natural gas rig count and a 23% (or 100-rig) reduction in oil-driven activity from peak levels,” wrote Raymond James analysts J. Marshall Adkins and John Fitzgerald. “It should also be noted that we expect operators to significantly cut their activity in the coming weeks due to the holiday season and many of these rigs will not come back to work.”

What’s changed, said Adkins and Fitzgerald, are the fundamentals, which “have deteriorated for both oil and natural gas prices due to the degradation of the global economy and the credit markets.” Earlier this month Raymond James cut its 2009 oil forecast to $60/bbl from $90/bbl, and if prices remain low, analysts said the U.S. oil rig count, which had been growing in the Permian and Bakken areas, could see 100 rigs laid down.

A drop in natural gas drilling already has begun, the Raymond James analysts noted, pointing to the string of announcements to cut spending by exploration and production companies in recent days.

“With the rig count up y/y (through November), gas production gains versus last year should continue to grow through 1Q2009,” wrote Adkins and Fitzgerald. “Even if we plug in our ultra bearish activity assumptions, U.S. gas production should continue to post y/y growth until the summer of 2009. For this reason it is already too late to correct the gas oversupply situation in 2009 without gas well shut-ins next year.”

However, Raymond James’ 2010 outlook has modestly improved. The gas supply response from a lower rig count in 2009 should result in a slightly undersupplied market in 2010 — assuming the U.S. economy is rebounding by then.

“As we enter withdrawal season late next year, the gas production response should turn bullish for natural gas prices,” the Raymond James analysts said.

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