Natural Gas Production Declines Are Becoming More Evident

The EIA released their 914 (gross withdrawals) data and their Natural Gas Monthly with data for the month of July 2009 today. Each month we prepare a slide show highlighting the key moving pieces of the U.S. natural gas production picture. Each month this year, we along with many analysts and traders have been left unimpressed with the declines demonstrated in the key producing regions and in the aggregate production data. Not this month.

• Total production for the first time since May 2006 is down on a year over year basis without the aid of hurricane related shut ins.
• U.S. Lower 48 natural gas production was 58.9 Bcfgpd
  • Down 0.2 Bcfgpd from year ago levels
  • Down 0.6 Bcfgpd from June
  • Since the Spring 2009 peak, Lower 48 produciton is off 0.9 Bcfgpd (1.4%)
• Texas, the largest piece of the U.S. production pie (32% of production), continues to show noticeable declines.
  • Texas production is down 1.5 Bcfgpd from its November 2008 peak (down 7%).
  • Production is down 1.0 Bcfgpd since March 2009.
  • Rigs have recently stabilized but I don't expect a meaningful bounce until gas prices are firmly above $6 / MMBtu.
  • Caveat: There are lots of drilled but not completed wells in Texas (100s) so expect to see a slower decline as prices creep higher and these wells are quickly turned to sales.
• Louisiana: Hockey stick action - Haynesville Shale completions continue to impress.
  • At 7% U.S. production, this is one of the few growth drives at current prices.
  • Company after company plans to hike their well count by the beginning of 2010, regardless (or nearly so) of prices (from HK's mouth today) but CHK and others are looking to add rigs despite low prices to get acreage into HBP status.
• Other States production is plateauing.
• Wyoming - production took a dive, numbers are probably in part related to crude shut ins that occured over the summer as the Bakken play bumped up against capacity and weak gas prices in late Spring. This probably bounces back a bit later this year.
• New Mexico - trending lower.
• Oklahoma - Blame NFX and FST and host of others for following their Woodford Shale success with a non shale horizontal play in the Granite Wash.

Nutshell: The long awaited production declines are beginning to become more noticeable. As basis differentials shrink in various regions, it becomes clear that curtailments are not the only limiting factor in the recent smaller than expected.weekly storage data.

Disclosure: We hold stock and or option positions in NFX, CHK, HK, and FST.

Comments

[bfras921:]

zman is an expert on energy stoxks

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Sep 30 08:09 AM

[bfras921:]

correction

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Sep 30 08:20 AM

[Ferdinand E...:]

This is an interesting aspect of the US gas story. Now tell us something about reserve movements, so that we get the entire story.

Sep 30 10:00 AM

[Elliott:]

Any year-over-year analysis using 2008 as a comparison is misleading. When the financials and the hedge funds ran up the price of energy during the commodity bubble last year, the high prices made it attractive for drillers to produce as much as possible. This lead to massive overproduction, which is stuffing all of the available storage today.

Last week 67 Bcf was put into storage. The five year average, using EIA numbers, is 65 Bcf this time of year. I'm not seeing evidence of lower-than-normal production, only a return to normal levels. I think the real story is that we continue to have normal production in the face of a 500 Bcf surplus.

Sep 30 11:55 AM

[blanco-dee:]

Excellent article, just the kind of information small investors like myself need,

somehow, I don't quite see how the futures markets get soooo speculative - with such high storage figures it looks like speculation alone is holding nat gas prices up,

and probably the same for oil too,

It is articles like this that keep me coming back to seeking alpha every day - keep 'em comin!

Sep 30 02:09 PM

[Mmarrkk:]

Elliott: you may be right but not exactly for the reason stated. Could it be that storage was a bit higher due to lower demand...the other side of the story? Also, need to adjust storage additions to account for weather.

Sep 30 02:57 PM

[koolsool:]

Historical data on rig counts will not be accurate due to new technology. Now many horizontal wells are drilled from one rig. Which makes rig counts much less, but production the same or more from less rigs.

Sep 30 03:20 PM

[tuj:]

How many drilled but uncompleted wells in TX do you think are hiding "behind the pipe?"

Sep 30 03:51 PM

[Elliott:]

Mmarrkk: you raise a good point. I would meet you halfway, and say that the current gas surplus is due to both overfinancing (i.e., loose money) in '08 and depressed demand in '09.

Sep 30 04:48 PM

[jerrydd:]

With so much in storage and low price it's amazing production is as high as it is. If I owned wells I'd be holding production down until prices rose.
It was old, low production rigs retired with fewer new one easily making up the difference from their larger output/well.

Sep 30 05:06 PM

[WPSPIKER:]

With the production from NEW multi-direction drilling rigs the low count is nothing to worry about with the massive storage filled up and the less than bad temps and downed industrial production the nat gas prices are being held up by speculation is best that most people in the know can figure. UNG for example helps little guy get into the market and helps to prop up futures prices which effect pricing all around. While it UNG probably is not going to make anyone much money in near term and is too unpredictable for far term. best bet is not the producers either but transporters and end users who will be biggest benefits in next few years with down prices for the product of NG. Look to gas pipe line companies who get paid for the amount that moves through the lines and those that benefit from selling the gas to end users, there are several good ones who pay great dividends with solid earning to support them as well as most of them have rate increases to the ave home user on books and approved through state/local gov and once the price is increased you know they will not claw back that trend... Look to elec. utilities who have NG as a feed in raw material to produce electricity as well. I own NI, DUK, FST, VLO and recently took profits and got out of CHK....
my well meaning advice and not an expert would be to look at as many similar companies as you like, do home work prior to jumping into anything right now as utilities and pipe line companies are lagging overall markets but that is good as it leaves more room for them to go up and less room to drop. Cyclicals are hot at the moment but there is lots of volatility in them. Producers are going to have a pull back real soon I think and the utility/defensive sectors will hold firm and maybe start to rise at a better rate and catch up to the overall market place.

mark

Sep 30 08:26 PM

[meridian575:]

Great Article! Perhaps the speculation is keeping prices up, because Obama's administration is spending money to get natural gas powered truck fleets on the road. For instance, the Administration's DOE Clean Cities program earmarks almost 300 million dollars to advance the number of alternative vehicles on the road. And that includes all technologies, electric, hybrid, biodiesel, ethanol, but also propane and natural gas. Yahoo Finance has the details on the Govt. Spending and its effect on the sector:
finance.yahoo.com/news...

Oct 01 11:37 AM

[wareagle:]

Remember, a lot of small operators will not have the cash, to drill, complete, and then not produce their wells. It is like holding inventory. If you can't pay your monthly bills, you are better off selling at a slight margin than going out of business waiting on higher prices.

Oct 01 02:57 PM

[Ron2008:]

Henry Hub cash prices are at $2.91. Futures are at $4.46. With inventory so full I suspect that futures will be going down.

Oct 01 11:01 PM

[Ron2008:]

Does anybody know what the normal spread between cash and futures is for this time of the year?

Oct 01 11:07 PM

[dwprice:]

Can someone say why nymex has shown such a relatively high price ($4.37 right now) and all the local delivery hubs like Waha are showing $2.90 gas? Does nymex account for speculation and hub prices are cash prices?
I would echo what someone said, keep up the good articles.

Oct 02 09:02 AM

[Ron2008:]

Cash NG down to < 2.30 today.

Oct 02 11:51 AM