If the U.S.’s pure-play shale gas producers can survive the sub-$2/MMBtu gas prices this year, they could enjoy a 50% to 100% jump in the price of natural gas when the next winter heating season starts in November, analysts said.
The primary driver for the bump in gas prices would be a fall-off in the amount of gas associated with shale oil drilling, primarily in Texas’ Permian Basin, as exploration and production companies lay down rigs in response to the Saudi-Russian oil price war and tanked oil demand amid the coronavirus pandemic.
With 2 Bcf/d or more of associated gas dropping out of the supply equation, and Appalachian and Haynesville shale producers drilling fewer wells in 2020 to conserve cash, the gas market this year is slated to burn through existing oversupply, according to sector analysts. The glut has depressed prices for more than a year, but the shifting dynamics may pave the way for a big jump at the onset of the winter heating season in October, analysts said.
“We think a partial ‘snap back’ in economic activity and a massive decline in U.S. gas supply in 2021 should result in significantly higher prices next year,” Raymond James & Associates oil and gas analyst John Freeman said March 30. “We expect an average Henry Hub price of $3.50[/MMBtu] for next year and anticipate gas reaching the $4 threshold in [the fourth quarter of 2021].”
In that environment, 2021 is “shaping up to be a bullish year for Henry Hub prices,” energy data analysts at S&P Global Platts Analytics said March 26. “If crude oil continues to languish in the $20-30/barrel range, associated gas declines will begin to take hold later this year and into 2021. As a result, this should force Henry Hub prices to surge higher in 2021 (potentially above $3/MMBtu).”
Even with the price boost, Platts Analytics does not see gas drillers, under pressure from investors to generate free cash flow and cut off from easy credit, racing to increase production as prices move higher.
Before companies can make it to the higher price environment, though, a large number of variables all need to fall into place for gas drillers to survive and thrive, Stifel Nicolaus & Co. shale gas analyst Jane Trotsenko cautioned. “We believe it is prudent to remain cautious on natural gas equities until we have more clarity on economic recovery from coronavirus impact,” Trotsenko told her clients March 30. “Subsequent OPEC meetings also create a lot of uncertainty around associated gas outlook and could change current supply demand dynamic in no time.”
Stifel rerated on March 30 the entire shale gas sector she covers, downgrading companies with a significant NGL component to their production stream such as Appalachian drillers Antero Resources Corp. and Range Resources Corp. while upgrading dry gas drillers with good balance sheets such as Appalachia’s CNX Resources Corp. and Haynesville Shale producer Comstock Resources Inc.
“Given sustainable free cash flow and improving leverage profile, both names should outperform their peers in a bearish tape,” Trotsenko said. “CNX and [Comstock] are now the only two Buy-rated names out of nine natural gas stocks we cover, reflecting our cautious stance on natural gas space for the near-term. While the picture is still quite blurry, the turning point is becoming more likely.”
Stifel downgraded EQT Corp., the nation’s largest gas producer by volume, to Hold from Buy amid worries about EQT’s shrinking EBITDA because of low gas prices and ability to sell assets to service near-term debt obligations. Stifel also kept northeast Pennsylvania gas giant, Cabot Oil & Gas Corp., as a Hold on concerns about the performance of new wells and Cabot’s lack of hedge protection against low prices.
Raymond James’ Freeman showed greater optimism for Cabot. “Outperform-rated Cabot is unquestionably the big winner of our projected resurgence in natural gas prices,” Freeman said. “The operator has minimal leverage of ~1x [debt/EBITDA] (meaning it could survive a longer COVID downturn than anticipated) and no 2021 hedges giving it maximum exposure if our bullish 2021 price deck proves correct.”
“For the higher levered gas [exploration and production companies] (basically every Marcellus operator except Cabot), it’s all about trying to survive long enough to enjoy the gas price rally next year,” Raymond James wrote.
S&P Global Platts Analytics and S&P Global Market Intelligence are both owned by S&P Global Inc.