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should be temporary in nature (i.e., less than six months), we cannot ignore the possibility that some of these may become more structural,longer-term delays.Before you get too bulled-up on U.S. natural gas, let’s make one point clear: the U.S. natural gas growth curve has been flattening (notrolling-over). The pace at which pressure pumping and pipeline capacity can be added to the oilfield is likely to determine the extent of thisproduction plateau. Our guesstimate is that we’re already beginning to see the “lid” lifted and onshore production increases this wintershould begin to offset the lingering gas supply declines from an inactive Gulf of Mexico. The recent sell-off in natural gas prices (down10+% over the past two weeks) lends further validation of this point. And more importantly, the flattening in the natural gas futures curvesince early May – with 2012 contracts falling by $0.50/Mcf and 2015 contracts by a whopping $1.00/Mcf over that period – sends a clearpricing signal that the market believes low gas prices and easy gas production growth are here to stay. We agree.
Recent public company results confirm EIA-914 trends.
For nearly a decade, we have tracked reported gas production from publiclytraded U.S. producers (comprising roughly half of total domestic gas production) as a check on the DOE data. Over time, the publiccompany data has been more accurate than the monthly DOE data (that has sometimes been revised). We have just finished compiling ourmost recent quarterly analysis (2Q10), in which publicly traded companies showed another strong y/y gas supply increase of 3.7% (or 1.1Bcf/day). This means that domestic supply has climbed back and now sits comfortably above the peak levels achieved prior to the massiverollover in the rig count in late 2008/early 2009. Taking a closer look at the breakdown within our production survey, the publicindependents continue to carry the load in terms of overall supply growth – posting growth of 6.9% y/y (1.4 Bcf/day) versus a decline out of the integrated majors of 3.4% (0.3 Bcf/day). Despite comparable domestic gas footprints, the disparity in production profiles between thetwo groups is nothing new. The independents (in large part) are more keenly focused on growth, while integrated majors place a muchgreater focus on international projects.Interestingly, our survey revealed a sequential
slowdown (or flattening) in the production growth curve
of publicly-traded producers.Specifically, sequential growth of 1.3% (0.4 Bcf/day) in 2Q10 versus the 2.4% (0.75 Bcf/day) exhibited in 1Q10. This should come as nosurprise for those tuned into the EIA-914 data, which has shown relatively muted growth during the first two months of 2Q10. To put it inperspective, onshore U.S. gas supply grew (on average) 0.8 Bcf/day in each of the first three months of the year but only increased 0.4Bcf/day in April and 0.2 Bcf/day in May. As mentioned above, we are not entirely sure as to the explanation given the continuedacceleration in horizontal drilling. The easy scapegoats are pipeline and gas processing bottlenecks or the more popular frac capacityconstraint argument echoed by many public companies this past earnings season. Again, we are not entirely convinced that explains asustained flattening in production. Assuming private producer growth trends mirrors larger publicly-traded peers (which history has shownto be the case), we would expect the upcoming June EIA figure to also reflect this flattening trend.
U.S. Natural Gas Production (MMcf/d)Category2Q:101Q:102Q:09Majors & Gas Utilities
8,9749,0379,286
Estimated Sequential Change-0.7%Estimated Y-Y Change-3.4%
Independents
21,78221,32520,384
Estimated Sequential Change2.1%Estimated Y-Y Change6.9%
Total
30,75630,36229,670
Estimated Sequential Change1.3%Estimated Y-Y Change3.7%
Source: Company reports, JS Herold (all numbers pro forma for acquisitions and divestitures)
Constrained frac capacity a popular tune this EPS season – could explain flattening curve.
As presented earlier in this piece, a number of producers have noted a mounting backlog of uncompleted wells across the highly active shale plays (Haynesville, Fayetteville, etc.). This listof operators can be placed into two distinct buckets: the “haves” and the “have nots.” Generally speaking, the “haves” represent the largerindependents that have been able to more effectively lock up service and frac’ing contractors, whereas the “have nots” are those smallerplayers standing near the end of the line in terms of securing incremental frac crews/equipment. The “haves” are already beginning to drawdown upon their inventory of uncompleted shale wells, while in some cases the “have nots” won’t be able to make any meaningful dent untilearly next year. All-in, this points to a more gradual acceleration (or rather, reacceleration) in domestic land production over the comingmonths.Regardless of the delays, the public companies are guiding to full year 2010 gas supply growth similar to what we saw in 2Q (up 6.9% forindependents and 3.7% for all publics combined). In fact, the
largest public independents are still projecting natural gas supply to be up awhopping 7% y/y in 2010
. Translating this into a growth estimate for the entire U.S. it would amount to just under a 4% (or about 2.5Bcf/day) growth in U.S. gas supply for 2010.
Looking to 2011, the crystal ball is cloudy
. Operators have yet to give production guidance butmost are signaling 2011 budgets being flat to up modestly. Since costs are sure to be higher and budget dollars are undoubtedly beingshifted to the more oily and liquids-rich plays, we expect to see a 20% (or 200 rig) decline in gas rigs by the end of 2011 (down from the 992active gas rigs today). That said, the natural gas rig count in 2011 should still average 5-10% higher than the 2009 average gas rig count of 800 gas rigs. Additionally, the delayed completions from this year and a modest recovery in late 2011 Gulf of Mexico activity should supportcontinued growth in U.S. gas supply well into 2011. Our early guess for 2011 is an additional 2 Bcf/day of supply growth but we shouldemphasize that a lot could change this guess over the next six months.
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