Natural gas production could begin to slow in the U.S. after a decade of relentless growth.
Financial stress continues to sweep over the industry, and after years of promises from drillers that prosperity would follow growth, some of the largest drillers are changing their tune. Instead of growth-at-all-costs, some companies are cutting spending and intentionally lowering growth targets.
This dynamic has been underway for much of this year, but some high-profile comments from shale executives following the latest round of earnings underscores the shift.
Much of the attention has focused on oil E&Ps, particularly those in the Permian. But the course correction from shale gas players is no less significant.
One of the companies that epitomizes the market malaise is EQT, which happens to be the largest gas producer in the country. The Pittsburgh-based shale driller dominates the Marcellus shale, but its financial performance has turned off investors. Its share price is down by half since the start of this year, and is down 80 percent from five years ago, despite the ramp up in production.
EQT has been a big proponent of the sorts of intensified drilling techniques that have been taken up by many companies, with mixed success. EQT trumpeted ever-longer horizontal wells, but it has run into trouble. A year ago, it said that spending would be higher than expected, in part due to “the learning curve on ultra-long” horizontal wells. The experiment cost the company hundreds of millions of dollars.
The missteps contributed to a change of management. Toby Rice was head of Rice Energy, which was acquired by EQT in 2017. But after a string of dismal financial results, Rice succeeded in ousting EQT’s CEO earlier this year. He sold shareholders on the idea of cost-cutting and free cash flow, rather than aggressive growth.
One of his signature initiatives has been a major corporate restructuring. On the company’s third quarter earnings call, Rice played up the overhaul, arguing that it has simplified the organizational structure and has broken down “silos” between departments. He also said that EQT is making progress on “large scale combo development,” referring to a standardized way of drilling 10 to 25 wells per well pad. The crucial point on this approach is that the drilling is planned years in advance so that everything is choreographed, taking into account drilling at other locations as well as available pipeline space.
In the third quarter, Toby Rice said that the company is reducing decline rates and succeeding in other drilling efficiencies. “The 100-Day Plan has been a massive success in kick starting our evolution,” Rice told investors on an earnings call.
But another agenda item has been to slash spending. As part of Rice’s restructuring plan, EQT cut its workforce by 25 percent a few months ago. The company will deploy half as many rigs in 2020 as it did this year, although Rice said this is proof of major efficiency gains. The company will slash capex by around $525 million in 2020.
Importantly, production growth will come to a halt.
“We are a victim of our own success, but the cure for low gas prices is low gas prices,” Rice said at an industry conference in Pittsburgh in October. EQT reported a loss of $361 million in the third quarter, down from a $127 million loss in the same period a year earlier.
In October, Rice said that there is an upside to low prices. “With gas prices being low, you see what we are building is demand for our product. We are creating a lot of relief for consumers.”
But that’s an optimistic take on a familiar conundrum facing the shale gas industry. Drillers struggle financially, especially when gas is trading at $2.50/MMBtu or below. Low prices may stoke demand, but companies are burning cash.
The industry now has to slam on the breaks. Higher demand and lower growth may help boost prices, but at higher prices, the gas industry will face stiff competition from other sources of energy. Utilities can lean harder on coal plants, while renewable energy is increasingly the lowest-cost option for new power generation.
However, this dynamic that unfolds at higher gas prices is almost a moot point in the short run, since ample volumes of gas in inventory may place a cap on prices. The latest data from the EIA shows that gas stocks rose to 3,729 billion cubic feet (Bcf) for the week ending on November 1, a whopping 530 Bcf higher than the same period a year ago. U.S. gas inventories are now higher than the five-year average.
After a brief price spike before the onset of winter last year, prices fell back as winter proceeded and volatility was relatively low. And that occurred against a backdrop of tight inventories. This year, the U.S. is heading into a winter season with plenty of supply.
Gas drillers are likely praying for a freezing cold winter, which may be the only near-term thing that could keep prices out of the doldrums. “A mild winter across the northern hemisphere or a worsening macro backdrop could be catastrophic for gas prices in all regions,” Bank of America said in a recent note.
By Nick Cunningham of Oilprice.com
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