Wednesday, February 24, 2010

Natural Gas Outlook ala Credit Suisse

With such focus in our region of SW Pennsylvania on the Marcellus Shale I include here a brief blurb about the investment bank, Credit Suisse view on natural gas over the next year.

Oil & Gas, Exploration and Production J. Wolff

Q4'09 U.S. Gas Production Showing Up 0.4% Qtr/Qtr

Supply Stabilizes in Q4'09. With 90%+ of our quarterly gas survey now complete, we find that U.S. gas production rose 0.4% qtr/qtr and 1.7% yr/yr.

Recent supply numbers continue to surprise the market in their resiliency given shut-ins in
October and a rig count that was down 51% yr/yr in November. Clearly, we have an incomplete data set that excludes private producers. However, we think our survey is a fairly close proxy. In fact, recent 914 data for November (which is a more exhaustive data set) shows that Lower 48 supply is less than 1% off its peak in February 2009.

Look for Muted Gas Prices. With supply now stabilizing, LNG imports likely to move higher in Q2'10 and drilling activity on the rise, we would look for fairly muted gas prices through 2010. Front-month gas now trades below $5.00 per MMBtu but may find some stability given that coal price parity is close to $5.00 per MMBtu. Our NYMEX outlook remains $5.25 per
MMBtu for 2010 and $6.50 per MMBtu for 2011.

Drilling Activity on the Rise, E&Ps Set to Grow 7% in 2010. The theme from year-end conference calls continues to be rising drilling activity focused on horizontal shale/tight gas plays. In fact, since the July trough the natural gas rig count has risen 34% to 893 from 665. Perhaps more importantly, the horizontal rig count has reached a new high, surging 77% from a
372 rig trough in June to 658 currently. We estimate that independent E&P natural gas production for our coverage universe (16.8 Bcf/d in 2010) is set to grow 6.6% in 2010.

John Barnyak
Stonehouse Asset Management