Struggling U.S. shale producers lose profitable niche
By Liz Hampton and Devika Krishna Kumar
DENVER, Feb 20 (Reuters) - Swooning prices for natural gas liquids (NGLs) such as butane and propane have dealt another blow to hard-hit U.S. shale producers, hampering the one market niche that had been supporting companies that slashed spending and reallocated rigs to bolster thin profits.
Strong exports have helped companies turn a profit on production of gas-liquids. Production in November was up 9% from a year earlier, after hitting a record 5 million bpd in October. Output this year of so-called NGLs, which are stripped from shale gas streams, should average 5.32 million bpd, up 22% from 4.37 million bpd in 2018, according to the U.S. Energy Information Administration (EIA).
"There is kind of a perfect storm here over the last few months around natural gas, and then oil and NGLs," Glen Warren, finance chief at Antero Resources, said last week. Export demand for gas-liquids remained strong through December, but the coronavirus outbreak "has put a blanket on everything," he said.
Other areas of shale production have already taken a beating this year. Natural gas prices slumped to less than $2 per million British thermal units (mmBtu), below what it costs to pump in many areas. Crude is trading around $54 a barrel, down nearly $12 from early this year. Falling demand for natural gas liquids (NGLs) has dented the third leg on the industry's stool.
Shale companies have kept production rising by nimbly adjusting when crude or gas prices rose or fell. But adjustments are harder now that China's coronavirus outbreak has hit global demand for energy commodities and OPEC and allied producers are uncertain about whether or how much to deepen their curb on oil production.
With investors pressuring shale producers to shift cash to dividends and share buybacks instead of more production, NGLs, which include fuels such as propane and butane, have helped prop up bottom lines -- especially for shale producers operating in heavily natural-gas fields.
Now that market has gone south also. Propane was trading around 40 cents per gallon this week, down about 40% from a year ago <PRO-USG>. Butane prices <BUT-USG> were roughly 72 cents per gallon, down from about 89 cents a year ago. Propane prices are typically higher in the winter because it is used as a heating fuel.
Companies like Antero that got ready profit from NGLs are shifting gears. With $3.7 billion in debt and expenses consuming most of its cash flow, it aims to wring $1 billion from asset sales to pay off notes that come due beginning late next year.
(For a chart comparing NGL prices to U.S. crude, click here: https://tmsnrt.rs/2V9SLd1)
Other companies operating in the Appalachia and in Oklahoma's SCOOP and STACK plays, abundant in natural gas and gas-liquids resources, are in similar straits.
"SCOOP/STACK producers, facing lighter barrels and uneconomic frac margins, will continue to scale back investment," warned Amrita Sen, co-founder of researcher Energy Aspects in a note.
Shale producer Marathon Oil Corp last week said it would cut gas drilling in Oklahoma "largely in response to the dramatic weakness in gas and NGL pricing relative to oil" and shift resources to richer crude-oil areas.
"There has been a notable pullback of capital expenditures by companies that drill for natural gas and NGLs," said Jesse Mercer, an analyst for consultancy Enverus. If gas-liquid prices stay low, pipeline and gathering projects could stall, he said.
Even companies that focus primarily on oil production feel the latest drop. The NGLs drop "does have an impact," said Joe DeDominic, president of Anschutz Exploration Corp, in an interview Wednesday in Denver. "If we were in some other plays, and looking at the economics of other plays like we do, it would have a much more material impact."
(Reporting by Liz Hampton in Denver and Devika Krishna Kumar in New York; Editing by David Gregorio)
