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Specific Shale Plays In Pennsylvania, Texas And Louisiana Seeing Increased Rig Counts, According To Industry Expert

December 28, 2009 - The Wall Street Transcript has just published Oil & Gas Production and Distribution Report offering a timely review of the Energy sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.

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ETHAN BELLAMY, Senior Vice President of Natural Resources within the equity research department of Wunderlich Securities, specializes in the analysis of master limited partnerships. Previously he was the Director of Research for the Lehman Brothers MLP Opportunity Fund in Houston, Texas, where he was responsible for fundamental analysis and due diligence in public, PIPE and pre-IPO investments in natural resources. Prior to joining Lehman Brothers, Mr. Bellamy was a Senior Analyst covering MLPs at Stifel Nicolaus, where his coverage included oil and natural gas production, gathering and transportation, propane distribution, marine shipping, coal mining and MLP-oriented closed-end funds. Mr. Bellamy previously worked as a journalist for various local and national media, and taught writing and journalism at the University of Colorado at Boulder for two years. More recently he was a doctoral student focusing on energy policy at the University of Colorado at Denver, with a focus on energy infrastructure and renewable energy policy. He holds an M.A. from the University of Colorado at Boulder and a B.A. from Clemson University.

TWST: What is going on at this point from a drilling perspective? Is that rig count indicative of what the industry is doing, which isn't much?

Mr. Bellamy: It's very geography specific; places where finding and development costs are very low are being drilled. And then secondarily, I would say that the places where operators have leases that will expire unless they hold them by production, those are being drilled. For both of these trends, we are talking specifically about plays such as the Marcellus Shale in Pennsylvania, the Haynesville Shale in Texas and Louisiana, Fayetteville Shale in Arkansas and Eagle Ford Shale in South Texas. Those are the types of places where you're still seeing a pretty active rig count and even in some cases an improving rig count. The decline in rig activity is in places that have a higher production cost, and that would include the Barnett Shale in the Dallas-Fort Worth area and other conventional sources of production in the U.S.

TWST: What can investors use as indicators that things are changing here?

Mr. Bellamy: Well, actually the best leading indicator on the natural gas market is probably the futures prices. I would describe that as "consensus-plus," meaning that the futures markets probably are the best indicator of where prices are going to go. That said, I think that it's actually pretty difficult for the layman, without spending a bunch of time and effort with spreadsheets, to come up with a really good estimate of supply longer term, which is ultimately going to be the determinant of U.S. gas prices. Another variable that we haven't discussed is LNG imports. EIA sees a pretty substantial increase in 2010. There are some liquefaction plants that have come online recently in Qatar, Yemen, for example, that are going to increase the supply in the Atlantic basin. That's an additional source of supply overhang that will probably help depress prices further in the near term. The U.S. is sort of the balancing consumer of LNG mostly in the summer because of our ability here to store much more gas than some of the other consuming markets that are really driven predominantly by heating demand.

TWST: I remember a year ago that LNG was a big topic. Has that eased thanks to all these new plays?

Mr. Bellamy: Well, unfortunately for firms such as Cheniere (CQP), near term the picture has really inverted. Before the shale plays, it looked like LNG was going to be necessary to provide gas for the U.S. After the shale plays have come online, we've seen how prolific they are; we've had extremely low rates of utilization for liquefied natural gas regasification facilities, and that's probably going to continue. The wild card is at what level do producers such as Qatar, at what level does it make sense for them to sell gas to the U.S.? There is an argument that says at any level, at any price it makes sense because they are really interested in keeping natural gas liquids production online, and they'll operate the LNG trains and sell the gas regardless of price. I do think that the market clears probably first for excess LNG cargos, second for the shale plays and then third for any kind of leftover conventional production that needs to fill in the gap on demand.

The remainder of this 76 page Oil & Gas Production and Distribution Report can be immediately viewed by purchasing online.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 76 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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