A recent natural gas-supply study from Tudor, Pickering, Holt & Co. Securities Inc. predicts a natural gas price of $7.50 per thousand cubic feet (Mcf) in 2010. The optimistic call ignited debate as well as pushback.

“Folks that have been holding on and hoping things will be better will get a respite,” said Dan Pickering, co-president and head of research for Houston-based Tudor, Pickering, during his keynote speech at Oil and Gas Investor and A&D Watch’s A&D Strategies and Opportunities Conference held recently in Dallas.

The caveat? “The economy rules all.”

Indeed, the industry had better breathe quickly and deeply during any respite. The firm “took down” its 2011-plus gas-price estimate to $6.50 per Mcf from $8.

In a research note sent out prior to the conference, Pickering reflected on points of consensus expressed since the $7.50 call. “Near-term, storage is going to fill and gas prices will stink. Longer-term, shale plays are going to provide plenty of gas…which says that gas prices long-term won’t be monstrously high…”

In between lies opportunity. “Because the endpoints are mediocre, we think lots of investors have written off the middle…if it is bad now and bad long-term, why care about 2010-2011? Note—our supply study would say this middle (2010, maybe 2011) is where the market could be quite tight.”

The die is cast for 2010 supply, the Tudor, Pickering team noted. “Wellhead supply troughs in second-half 2010…down 6.5 billion cubic feet daily (-10%) from year-end 2008.”

Disagreement about the study’s projections centers on liquefied natural gas’ (LNG) role and future gas-demand levels. “The impact of uncompleted wells is the one supply-related variable that has a lot of people thinking about a muted gas-price recovery in 2010 (over and above the issue of magnitude/timing of a wellhead-supply rollover),” according to the research note.

But the firm’s model expects the impact from uncompleted wells to add just 0.4 billion cubic feet per day to 2010-exit-rate production—“a constraining factor to price, but not a massive anchor.”

Addressing the A&D audience, Pickering advised U.S. producers to be prepared for a world with ample gas supply. Gas storage will continue to fill through 2009 and is nearing full capacity. He predicted a level of 58.6 billion cubic feet per day of gas production in this year’s fourth quarter, a drop to 57.2 billion in fourth-quarter 2010 and a rebound to 60.2 billion in the final quarter of 2011.

Pickering warned against overreaction when gas prices stabilize or rise slightly in the near-term. “Gas prices will be a pleasant surprise in the near-term. If prices begin to improve, people will think they will keep improving, but I think supply will also start to rise.”

The 2010 Nymex strip shows an estimated $5.75 per Mcf, compared with the Tudor, Pickering team’s $7.50. The firm’s forecasted $6.50 per Mcf for 2011 mirrors the strip’s $6.60.

As for oil, Pickering said the market is bullish but overbought; he predicted $60 to $65 per barrel in 2010.

“As we look at how this plays out, with more gas from shales and lower price decks, the haves and have-nots will become more readily apparent. The haves are the shale basins. I think the really interesting thing will be the wake-up call for the have-nots.”

Industry consolidation is coming, he said, driven by producers that need $7 or $8 gas to make their plays work. At some point, costs will rise ahead of gas prices, so high-cost operators will have to transition to lower-cost basins, sell assets or form partnerships to survive. Some M&A activity will be driven by a need for bolt-on acreage.

New shale-gas technology could disappoint as a cure for price-cost imbalances, but for now, the shales are the low-cost gas basins, said Pickering.

“The producers in the right spot won’t have to do a lot, just drill what you have,” he said.

“Wall Street is a fickle capital provider and likes stories that are getting better,” he said. “If forced to choose between valuation and growth, it wants growth. Shale is exciting because it is a growth story.”

The year 2010 could be a “glory year” for the E&P industry if gas prices rise and well costs continue to fall, he said. Rig utilization is bottoming at 35%, tamping down short-term rig costs.

The rig count will only rise to 1,500 in the long-term (2011 through 2013), with some 400 drilling for oil, 500 targeting nonshale gas and 600 hunting shale gas. “Shale is the big kahuna,” he said.