Underbalanced drilling has become increasingly popular as it reduces formation damage caused by fluid invasion during drilling operations. This is particularly important in the case of depleted reservoirs or when horizontal and deviated wells are drilled with long exposure time. As a result of the lower pressure in the wellbore, there is an inflow from the reservoir into the wellbore, which is continuously measured at the wellhead. This inflow carries information about the reservoir. The objective of this paper is to develop a mathematical model and its associated interpretation methods to estimate reservoir permeability and its variation along the length of a horizontal wellbore using the inflow measurements at the wellhead. The traditional methods of pressure and rate transient analysis are not applicable to underbalanced drilling data, particularly because the length of the producing interval is continuously increasing with time. In this paper, we will develop a mathematical model accounting for this complication. This model calculates inflow rates in the forward mode and the reservoir permeability when used in the backward mode. We have validated our methodology against synthetic data obtained from numerical simulation, and applied it to a number of actual field cases. In field studies, after estimation of the permeability profile along the wellbore, the estimated permeability values were used along with reported bottomhole pressure right after the end of drilling to calculate gas inflow. This was then compared with the measured total inflow. Good agreement was obtained between the predicted and measured values. In another field case, we successfully predicted the long-term gas production of the well. In addition, our calculated average permeability value was comparable to the one obtained from a well test analysis performed later in the life of the well. Furthermore, a series of studies were conducted to examine the sensitivity of the estimated permeability to errors in the reported inflow information and the pressure drop along the wellbore. The results reported in the paper indicate that the estimated permeability profile remained relatively unchanged.