Natural gas prices and the catch- 22
PowerSource
High natural gas prices may lift all boats, but low prices definitely sink some faster than others.
Natural gas futures contracts — the price that traders are willing to commit to for delivery at a set time in the future — are trading at three- year lows, driven in large part by a glut of natural gas which has outpaced demand.
The Marcellus and Utica shale producers that have spent the past decade coaxing more fuel out of the ground at ever lower costs have been rewarded with falling stock prices and angry investors. Now those companies must convince shareholders and analysts that they can survive another low commodity cycle.
CNX Resources Corp. saw its stock rise by 26% Tuesday after the Cecil- based company announced increased profits and said it can ride out this latest wave of depressed natural gas prices by hedging more than 86% of its production at fixed prices higher than what traders are paying on the futures market. It also plans to cut capital spending by 33%.
Even with the meteoric oneday rise and a $ 750 million share buyback program launched last year to drive up the value of each outstanding share, CNX stock still closed at half of what it fetched a year ago.
It is not alone.
Over the past year, Range Resources Corp. stock is down 62%. EQT Corp., 48%. Antero Resources Corp., 77%. Southwestern Energy Co., 57%. And Cabot Oil & Gas Corp. — now considered the major Marcellus Shale success story — is down 19% year over year.
The situation inspired former EQT CEO Steve Schlotterbeck to declare the oil and gas industry an “unmitigated disaster” for investors during a spicy presentation at a conference in Pittsburgh last month.
Mr. Schlotterbeck said shale gas players have been so good at coming up with the smarts and tech to drill ever more productive wells that they’ve flooded the market with cheap gas. And, he said, they remain unwilling to reverse course.
Every Appalachian oil and gas player says it is correcting its course, mainly by pursuing economic development rather than unbridled growth.
But the growth will come anyway.
On July 22, Bloomberg issued a note to investors titled: “U. S. production remains resilient, troubling.” Three days earlier, the same analysts said their “most pressing concern” is a small rise in gas prices triggering “a return to more prolific spending and higher production.”
This week, natural gas futures contracts are trading between $ 2.20 per million British thermal units and $ 2.70 through 2020 on the New York Mercantile Exchange.
Moody’s Investors Service recently predicted that even with capital budgets being slashed across the industry, gas production will increase this year and in 2020. Several factors are driving the increase, the ratings agency said, not least of which is how efficient companies have gotten at pulling molecules out of the ground with less money.
Even with a third less money for drilling and fracking next year, CNX projects it will still produce 12% more gas in 2020 before plateauing in 2021.
The company didn’t plan it that way, CEO Nick DeIuliis said. The production growth is a product of the company’s financial logic, not a goal, he said.
That’s the way the Rice brothers who ran Canonsburgbased Rice Energy Inc. and recently succeeded in taking the helm at Downtownbased EQT Corp. have been talking for years: They’re not out to increase how much gas they make just to show growth. They’re out to make it cheaper to get it out and more profitable to sell.
Yet as more producers have made the same calculation more explicit, the amount of gas in the market has continued to increase. The price has stayed at levels that five years ago would have been considered insurmountable.
Moody’s rating agency recently downgraded EQT to a negative outlook “based on our concerns about natural gas fundamentals.” While other Appalachian companies such as CNX, Range Resources, Antero and Southwestern have stable or positive ratings, Moody’s warned further drops in gas prices may cause downgrades in those as well.
The low commodity prices aren’t just weighing on company financials; they’re shifting the areas of desirable development.
“We all know where the best rock is,” said Chris Doyle, president and CEO of Huntley & Huntley Energy Exploration LLC, speaking at Hart Energy’s Developing Unconventional Gas East conference last month. “But the question now is what is the commercial core?
“I think you’re seeing the core of the Marcellus shift and it’s shifting to Allegheny and Westmoreland,” he said.
A pipeline catch- 22
The U. S. natural gas industry doesn’t act as a monolith. It doesn’t pull back production all at once or think through how much infrastructure will make sense to keep prices balanced.
Development of pipelines in Appalachia is a perfect example of how competition among exploration and production companies feeds into a disjointed environment.
For years, the most acute effects of the gas glut were local.
Appalachian producers pulled so much gas out of the ground that local demand couldn’t absorb it and there weren’t enough pipelines to move it to other markets. Companies were forced to sell at much lower prices than gas was fetching elsewhere, like in trading points in the South.
Talk from producers and economic development officials and politicians in Appalachia was all about the need for infrastructure: If the region didn’t want to stunt the shale revolution, it needed to build pipelines.
Building pipelines is difficult, costly and time- consuming — not to mention controversial — and pipeline companies needed assurance that if they built them, the producers would come. So they inked long- term transportation contracts with producers who would be required to pay for their reserved pipeline space.
Fast forward a few years and by the beginning of 2019, Appalachian producers are officially unconstrained. Pennsylvania specifically has nearly twice as much space in pipelines to carry gas out of the region, according to data available from the U. S. Energy Information Administration.
The lack of a squeeze in Appalachia has brought local natural gas prices more in line with the national benchmark.
Where in 2015, a molecule of gas sold at the regional Appalachian trading point would have gotten just 65% of the going rate at the Henry Hub in Louisiana, now it’s closer to 90%, according to David Deckelbaum, managing director of oil and gas exploration and production at Cowen Co., who spoke at the DUGEast conference last month.
Which means selling here and eating that smaller discount is now more profitable than paying to ship on pipelines.
Companies who paved the way for those pipelines with long- term contracts ended up on the losing side of the equation, as companies like CNX, which did not commit, reap the benefits.
Transportation commitments also limit how much companies can cut their drilling plans and, some analysts warn, may be keeping production artificially high.
Range Resources CEO Jeff Ventura tried to set his company apart in a February call with analysts, saying it doesn’t have “excess transportation agreements or other forces that would drive us to favor outsized growth over free cash flow.”
In a securities document filed a few days before Equitrans Midstream Corp. began trading as a separate entity from EQT Corp., the new pipeline company linked its financial condition to EQT’s production — warning investors that if commodity prices decrease or if EQT decides to drill elsewhere, Equitrans operations may suffer.
Equitrans is developing its Mountain Valley Pipeline, a delayed and controversial project that would serve Virginia and West Virginia. It’s intended to grow markets in the Mid- Atlantic and southeastern U. S.
On EQT’s latest earnings call last week, at least two analysts asked company leaders how the producer can back out of its commitment to the pipeline, even if it meant incurring a penalty.