Shale gas drillers struggle on [NGW Magazine]

The latest set of quarterly results from US shale gas drillers serves as a reminder of the difficult operating environment, but nonetheless contains some bright spots. And amid a new collapse in crude prices, things may even be looking up for gas producers, as the scaling back of activity in the Permian Basin seems set to alleviate the US gas glut.

Gas prices fell to new lows at the start of this year, with Henry Hub dropping below $2/mn Btu – a level last seen in 2016. The recent quarterly results illustrate the steps gas producers are taking to survive in this price environment. These include ongoing efforts to bring down well costs, for example with EQT saying its Marcellus shale well costs in Pennsylvania averaged $800/ft during the fourth quarter. Range Resources reported drilling and completion costs of $610/ft. And Chesapeake Energy has said its Marcellus assets have a breakeven price of $1.50-1.75/’000 ft³. However, not everyone agrees that this is enough to shield the company from the impact of low gas prices.

“We definitely don’t agree with the commentary that the company has provided,” a Tudor, Pickering, Holt (TPH) analyst, Sameer Panjwani, told NGW. “The way we look at it is that even in the Marcellus you still need higher prices for economics to work even in the best parts of the basin. So unless you have hedges that protect you, it’s hard to justify a programme that really does anything beyond holding volumes flat until pricing improves.”

Indeed, Chesapeake is among the companies that has sought to protect itself through hedging. The company has hedged 39% of its 2020 gas output through swaps at $2.76/’000 ft³ and has also hedged 76% of its oil at $59.90/barrel.

Chesapeake had been seeking to rebalance its portfolio so that it is more focused on oil than on natural gas. And until the Opec-Russia alliance fell apart in early March, with the group’s failure to agree to new production cuts causing a collapse in crude prices, trying to focus on oil assets had seemed like a good move for companies with both oil and gas output.

TPH said in late February that it was surprised to see Chesapeake’s 2020 production guidance of 456,000 boe/d in total and 116,000 b/d of oil, as this implied significantly more gas-weighted spending than the investment bank had been expecting. This included the five to ten wells that Chesapeake is planning to drill in the Haynesville shale in Louisiana, whereas TPH had been expecting the company to shelve at least temporarily its plans for that play. With oil prices dropping into the $30s/barrel, however, Chesapeake’s Haynesville plans now look more favourable.

Trying to sell

Another trend that can be seen among prominent shale gas drillers from their fourth-quarter results is their ongoing efforts to sell off non-core assets. Range, EQT and Chesapeake are all seeking to sell assets to pay down debt. However, there are concerns that they will struggle to find buyers in today’s market.

“That’s been the big question mark, as we’ve had conversations with investors and potential buyers and it seems like the appetite is fairly limited,” Panjwani said. He added that in other cases, the valuation at which the appetite would increase was not in line with what the sellers are targeting in terms of proceeds. “There’s a mismatch between price expectations between the buyer and the seller, and that’s not surprising given what’s happened to commodity prices.”

Undeterred by this, Chesapeake said it was targeting $300-500mn of non-core asset sales this year, while Range described asset sales as a high priority, and said it had a number of these underway. EQT, meanwhile, has reiterated its goal to sell $1.5bn worth of assets by mid-2020 – a goal TPH says it is sceptical of the company fully achieving.

In the spotlight

EQT – the US’ largest natural gas driller – has been closely watched since a management shakeup in 2019, after which the company announced that it would overhaul its performance and bring down costs. The company’s attempts to cope in the low price environment include its recent renegotiation of gas transportation rates, as well as the sale of half of its stake in pipeline company Equitrans Midstream. These deals are expected to provide EQT with about $535mn worth of fee relief over a three-year period starting in 2021.

“We think the announcement should be viewed favourably,” investment bank RBC Capital Markets said in an analyst note. “The announced rate reduction should provide meaningful rate relief but puts a higher burden on executing asset monetisation plans to fund upcoming 2021 maturities. However, management indicated it is confident weak commodity prices will not impede its ability to execute multiple transactions and continues to target execution by mid-2020,” RBC added.

As the drop in transport tariffs only takes effect with the start-up of the Mountain Valley pipeline, which will not be until next year at best, EQT will be under more pressure to sell assets in order to fund upcoming maturities in the meantime.

For its part, TPH said: “We’re glad to see these moves as a lower cost structure should lower leverage and increase the viability of the business in a low price environment.”

EQT also reported a bigger quarterly loss than the previous year for the fourth quarter of 2019, with an impairment charge of $1.12bn contributing to a net loss of $1.18bn. A year earlier, the company announced a loss of $636.7mn.

EQT has previously announced plans to scale back spending and drilling while it works on overhauling its business, and the company’s latest results reflect this. Comments made during EQT’s fourth-quarter earnings call also suggest that it would consider curtailing production if it is not achieving the returns it wants. It may not be the only one to do so if prices remain unfavourable.

“At this point, the majority of the companies have talked about holding production flat,” Panjwani said. “I would say that if you get into the summer and pricing is very, very weak, then you could start seeing some operators potentially shut in production just because it's not really super economic to deliver at that little a price.”

It is worth noting, however, that Panjwani’s comments were made before crude prices tumbled on March 9, altering the operating landscape. As the shale industry assesses what the impact of the new oil price collapse is likely to be, hopes have emerged that dry gas drillers, such as those operating in the Marcellus shale, could end up benefiting. This is because early evidence already points to activity slowing in the Permian Basin, where gas is a byproduct of drilling for oil. This in turn could help ease the US’ glut of natural gas, thus helping to push up gas prices.

Panjwani confirmed to NGW that this was in line with TPH’s expectations. This new confidence in improved gas prospects can also be seen in the fact that shares of prominent producers including EQT, Range, Southwestern Energy and Cabot Oil & Gas have risen as the oil market has descended into turmoil. For gas-focused companies, therefore, there may be a better operating environment to look forward to at last.

On the other hand, Chesapeake has been flagged up as a company whose survival was already in doubt, and is now more under threat than ever as a result of the lower crude price. While the company’s gas assets could now prove more lucrative, the new price environment severely undermines its effort to pivot more towards oil.