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Tickers in this Article: BHI, RRC, WLL, APA, EOG
The latest report on natural gas production from the Department of Energy showed another sequential increase in production, which is not reassuring for energy-stock investors. IN PICTURES: Eight Ways To Survive A Market Downturn

Another Increase
The monthly report covered February 2009, and showed a 1.1% sequential increase in natural gas production in the lower 48 states. Year over year natural gas production increased by 3.88%, but because of an adjustment in methodology, the two months are not directly comparable.

Industry View
Management at several different oil service companies had their own view on a production response. Baker Hughes (NYSE:BHI), a diversified company with a broad product line in the U.S. and internationally, said during its earnings conference call that given the large decline in the number of U.S. gas rigs, companies were undergoing a possible "production response". While this comment may seem to contradict the monthly report from the government, Baker management is considering real-time market information, while the Department of Energy is reporting production data that is two months old.

One problem lies in the unconventional resource plays that have attracted so much attention from exploration and production companies. Range Resources (NYSE:RRC) is involved in several unconventional areas in the U.S., and reported a 12% sequential increase in production in the first quarter of 2009. This growth is not unusual for the company, as its press release boasts of having grown production for 25 consecutive quarters. However, this production growth was achieved with only 15 rigs versus 33 in the same quarter last year.

Oil Vs. Gas
The contrast between the production response of oil and natural gas requires further scrutiny. Whiting Petroleum (NYSE:WLL) is primarily an oil producer with properties in the Bakken shale in North Dakota. The company reported that net production in the first quarter of 2009 declined sequentially from 55,540 to 54,320 barrels of oil equivalent (BOE) per day. Whiting attributed this decline to a decision by EOG Resources (NYSE:EOG), which is the operator of a field in which it has an interest, to delay completion on 13 wells. (For more, see Oil And Gas Industry Primer.)

Apache Petroleum (NYSE:APA) saw something similar in its central region of the U.S., where oil production fell by 1.5% sequentially. This occurred because Apache "severely curtailed drilling due to the price realizations." The central region contains the company's East Texas, Permian and Anadarko Basin assets.

Although these two cases are reported out of context and aren't representative of all oil production, it's interesting how such a small delay or cutback in drilling and completions can lead to a decline in oil production, while a cataclysmic drop in natural gas drilling nationwide has not yet had any effect.

The Bottom Line
The continued growth in domestic natural gas production is not encouraging because of the need to remove excess supply from the market, a necessary step needed to boost prices. This growth also seems to defy the logic of a collapsing natural gas rig count. (For related reading, see Become An Oil And Gas Futures Detective.)

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