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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--In late 2014, at about the time Saudi Arabia began flooding the market with crude oil, the Federal Energy Regulatory Commission (FERC) (Washington, D.C.) green-lighted construction of the Constitution Pipeline, a $280 million, 124-mile project that would bring up to 650 million dekatherms of natural gas per day from the Marcellus Shale to New York, New Jersey and New England. Cabot Oil & Gas Corporation (NYSE:COG) (Houston, Texas) stood to doubly benefit from FERC's decision: It was a 25% owner of the proposed pipeline, and that project would bring some of the gas Cabot extracted from the Marcellus Shale northward, heating homes and fueling electric generators in states starved of Pipeline capacity.
A lot has changed in U.S. Oil & Gas markets since then. Industrial Info's "Then & Now" series explores what independent Oil & Gas Producers have done since crude-oil prices collapsed in late 2014 to become more competitive and continue operating in a low-price environment. For earlier pieces in the series, see January 4, 2017, article - Then & Now: Continental Resources Cuts Costs, Boosts Outlook, but Losses Grow, and January 11, 2017, article - Then & Now: Sheffield Ends Run at Pioneer with a Bang, Leaves Company Well-Positioned for New Leaders.
After FERC's late-2014 decision on the Constitution Pipeline, Cabot and the project's other owners--subsidiaries of Williams Partners LP (NYSE:WPZ) (Tulsa, Oklahoma), Piedmont Natural Gas Company (NYSE:PNY) (Charlotte, North Carolina) and WGL Holdings Incorporated (NYSE:WGL) (Washington, D.C.)--predicted gas would begin flowing through their pipeline by the winter heating season of 2015-16, assuming it received all the necessary regulatory permits.
It didn't. In early 2016, the New York State Department of Environmental Conservation (NYSDEC) (Albany, New York) denied a water permit for the pipeline, plunging the project into litigation. For more on that, see April 26, 2016, article - Tough Times for Pipelines: Two Major Northeast Projects Hit Roadblocks. The pipeline project missed the winter heating seasons of 2015-16 and 2016-17. Constitution filed suits in two federal courts to overturn the NYSDEC decision. Decisions have not yet been handed down. Even if it wins those appeals, the pipeline is not expected to be operating by the winter heating season of 2017-18. The following year, the winter heating season of 2018-19, is the new target, according to Constitution.
"We remains steadfastly committed to the project and are optimistic the Court will announce its decision in 2017," Christopher Stockton, Continental's spokesman, told Industrial Info. "We don't know exactly when that decision will come, but hopefully by spring/summer 2017. In light of the pending legal challenges, the project's in-service date is targeted as early in the second half of 2018, which assumes that the legal challenge process is satisfactorily and promptly concluded."
Industrial Info's Oil & Gas experts will discuss market trends and spending outlook for that industry at Industrial Info's upcoming Market Outlook & Networking Event at the George R. Brown Convention Center in Houston, Texas, on January 17, 2017. The event is complimentary but space is limited, so be sure to RSVP today!
New York, New Jersey and New England badly need the gas that is scheduled to flow through Continental and other proposed pipelines. Those states are closing coal-fired generators and converting some coal-fired power plants to burn natural gas. In terms of grassroot generation projects, developers are effectively limited to building renewable generation and gas-fired generation in those states. And renewable energy's output needs to be backed up by dispatchable generation, which in New York, New Jersey and New England means natural gas. Those regions pay some of the country's highest prices for natural gas because of high and rising demand, coupled with limited inbound pipeline capacity. For more on that issue, see July 7, 2016, article - NERC Frets About Some Regions' Over-Reliance on Gas-Fired Generation, April 26, 2016, article - Low Commodity Prices Kill, Stall North American Pipeline Projects and December 1, 2015 article - Closure of Pilgrim Nuclear Plant Sparks New Debate Over New England's Energy Future.
Constitution is not Cabot's only equity investment in interstate pipelines: The independent Oil & Gas producer also owns a stake in the Atlantic Sunrise Pipeline, a 200-mile, $2.58 billion project that is scheduled to transport up to 1.7 billion cubic feet of gas per day (Bcf/d) across Pennsylvania, where it will interconnect with other pipelines. That proposed project took a step forward December 30, when FERC issued a final EIS, and a final permit is expected from federal regulators in the coming weeks. Assuming all required permits are received, construction of that intra-state pipeline is scheduled to begin this May, and the pipeline is expected to be operating during the summer of 2018. For more information, see January 9, 2017, article - Atlantic Coast Pipeline Gets Boost from FERC, County Supervisors.
Cabot, the dominant producer in the gas-rich Marcellus Shale, invested in these two pipeline projects because it needed additional ways to get its gas to markets. The company's gas production from that shale formation has soared in recent years, and it expects production to continue growing in 2017 and 2018, once the Constitution and Atlantic Sunrise pipelines enter service.
Click on the image at right to see Cabot's historic and projected gas production from the Marcellus Shale.
Cabot's production growth mirrors the rising amounts of natural gas being extracted from the Marcellus Shale, despite low gas prices. Industrial Info is tracking about $200 million of Cabot's active drilling projects in the Marcellus Shale, mainly northeastern Pennsylvania's Susquehanna County.
Click on the image at right to see gas production growth in the Marcellus Shale.
The independent producer, which also extracts hydrocarbon from the Eagle Ford Shale in Texas, saw its capital investments in the Marcellus peak in 2014, when it sank $979 million into it. Since then, it has cut capital outlays way back, though it told investors late last year it plans to increase its Marcellus capital spending by more than 50% in 2017--to an estimated $625 million. That sum includes a $50 million equity investment in pipelines.
Click on the image at right to see a chart of Cabot's historic and projected capital spending in the Marcellus Shale.
Unlike crude-oil producers, who received very high prices for their product in 2014 until the market collapsed, gas producers have battled soft pricing for years. Across the U.S., gas production has soared, overwhelming demand growth and leading to weak pricing. And most analysts expect the gas glut to continue, despite the start of exports of liquefied natural gas (LNG) and rising demand growth from the Power and Chemical Processing industries. For more on that, see December 16, 2016, article - ABB Forecast: Natural Gas Prices to Stay Low.
Investors also predict weak pricing for natural gas in 2017 and 2018. Gas futures prices traded on the New York Mercantile Exchange (NYMEX) show expected gas prices stuck in a narrow range of between about $2.86 and $3.60 per million British thermal units (MMBtu) for 2017 and 2018.
Click on the image at right to see historic, and predicted, prices for natural gas at Henry Hub, Louisiana.
Producers in the Marcellus have been forced to take significantly lower prices for their product, sometimes as much as $1 per MMBtu less than cash prices at Henry Hub due to constrained outbound transportation capacity in the Marcellus. Cabot offsets that by using hedges to lock in prices for its product, but even using those instruments the company was only able to get about $1.75 per thousand cubic feet (Mcf) of gas in the third quarter of 2016, down 13% compared to the third quarter of 2015, the company said in its third-quarter 3016 earnings statement.
"The volatility in commodity prices continues to challenge our industry and has driven us to be more efficient," said Dan O. Dinges, Cabot's chairman, president and chief executive, in the company's third-quarter earnings statement, released October 28, 2016. "We have been successful at creating a free cash flow positive investment program that still generates growth, while simultaneously driving down our cost structure and our resulting breakeven levels."
In a shot at regulatory agencies, Dinges added, "While our impatience with the regulatory pipeline approval process is very real, it has not impacted our focus on prudently managing this business for the long-term as evidenced by our results this quarter."
Cabot is still in business because cost management is in its DNA. The company is one of the lowest-cost producers, if not the lowest-cost producer, in the Marcellus. In a late-November 2016 industry conference, Cabot officials said they had lowered drilling costs per foot of lateral in the Marcellus 40% since 2014. Completion costs per stage have dropped 54% since then. And the company has slashed direct lease operating expenses 68% in the Marcellus since 2014.
Aggressive cost management has helped trim losses in recent years. For the third quarter of 2016, the company reported net losses of $10.3 million on revenue of $310 million. In the comparable year-earlier quarter, when Cabot received an average of $2.02 per Mcf of gas, it lost $15.5 million on revenue of $305.3 million.
"Cabot has been doing what it can--aggressively managing its costs and signing up new customers--while waiting for market conditions to improve and waiting for regulatory and court decisions on its proposed pipelines," said Jesus Davis, Industrial Info vice president of research for the Oil & Gas Production, Pipelines and Terminals. "Its pipeline investments look like a smart play--we hope the courts and regulators agree."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
A lot has changed in U.S. Oil & Gas markets since then. Industrial Info's "Then & Now" series explores what independent Oil & Gas Producers have done since crude-oil prices collapsed in late 2014 to become more competitive and continue operating in a low-price environment. For earlier pieces in the series, see January 4, 2017, article - Then & Now: Continental Resources Cuts Costs, Boosts Outlook, but Losses Grow, and January 11, 2017, article - Then & Now: Sheffield Ends Run at Pioneer with a Bang, Leaves Company Well-Positioned for New Leaders.
After FERC's late-2014 decision on the Constitution Pipeline, Cabot and the project's other owners--subsidiaries of Williams Partners LP (NYSE:WPZ) (Tulsa, Oklahoma), Piedmont Natural Gas Company (NYSE:PNY) (Charlotte, North Carolina) and WGL Holdings Incorporated (NYSE:WGL) (Washington, D.C.)--predicted gas would begin flowing through their pipeline by the winter heating season of 2015-16, assuming it received all the necessary regulatory permits.
It didn't. In early 2016, the New York State Department of Environmental Conservation (NYSDEC) (Albany, New York) denied a water permit for the pipeline, plunging the project into litigation. For more on that, see April 26, 2016, article - Tough Times for Pipelines: Two Major Northeast Projects Hit Roadblocks. The pipeline project missed the winter heating seasons of 2015-16 and 2016-17. Constitution filed suits in two federal courts to overturn the NYSDEC decision. Decisions have not yet been handed down. Even if it wins those appeals, the pipeline is not expected to be operating by the winter heating season of 2017-18. The following year, the winter heating season of 2018-19, is the new target, according to Constitution.
"We remains steadfastly committed to the project and are optimistic the Court will announce its decision in 2017," Christopher Stockton, Continental's spokesman, told Industrial Info. "We don't know exactly when that decision will come, but hopefully by spring/summer 2017. In light of the pending legal challenges, the project's in-service date is targeted as early in the second half of 2018, which assumes that the legal challenge process is satisfactorily and promptly concluded."
Industrial Info's Oil & Gas experts will discuss market trends and spending outlook for that industry at Industrial Info's upcoming Market Outlook & Networking Event at the George R. Brown Convention Center in Houston, Texas, on January 17, 2017. The event is complimentary but space is limited, so be sure to RSVP today!
New York, New Jersey and New England badly need the gas that is scheduled to flow through Continental and other proposed pipelines. Those states are closing coal-fired generators and converting some coal-fired power plants to burn natural gas. In terms of grassroot generation projects, developers are effectively limited to building renewable generation and gas-fired generation in those states. And renewable energy's output needs to be backed up by dispatchable generation, which in New York, New Jersey and New England means natural gas. Those regions pay some of the country's highest prices for natural gas because of high and rising demand, coupled with limited inbound pipeline capacity. For more on that issue, see July 7, 2016, article - NERC Frets About Some Regions' Over-Reliance on Gas-Fired Generation, April 26, 2016, article - Low Commodity Prices Kill, Stall North American Pipeline Projects and December 1, 2015 article - Closure of Pilgrim Nuclear Plant Sparks New Debate Over New England's Energy Future.
Constitution is not Cabot's only equity investment in interstate pipelines: The independent Oil & Gas producer also owns a stake in the Atlantic Sunrise Pipeline, a 200-mile, $2.58 billion project that is scheduled to transport up to 1.7 billion cubic feet of gas per day (Bcf/d) across Pennsylvania, where it will interconnect with other pipelines. That proposed project took a step forward December 30, when FERC issued a final EIS, and a final permit is expected from federal regulators in the coming weeks. Assuming all required permits are received, construction of that intra-state pipeline is scheduled to begin this May, and the pipeline is expected to be operating during the summer of 2018. For more information, see January 9, 2017, article - Atlantic Coast Pipeline Gets Boost from FERC, County Supervisors.
Cabot, the dominant producer in the gas-rich Marcellus Shale, invested in these two pipeline projects because it needed additional ways to get its gas to markets. The company's gas production from that shale formation has soared in recent years, and it expects production to continue growing in 2017 and 2018, once the Constitution and Atlantic Sunrise pipelines enter service.
Click on the image at right to see Cabot's historic and projected gas production from the Marcellus Shale.Cabot's production growth mirrors the rising amounts of natural gas being extracted from the Marcellus Shale, despite low gas prices. Industrial Info is tracking about $200 million of Cabot's active drilling projects in the Marcellus Shale, mainly northeastern Pennsylvania's Susquehanna County.
Click on the image at right to see gas production growth in the Marcellus Shale.The independent producer, which also extracts hydrocarbon from the Eagle Ford Shale in Texas, saw its capital investments in the Marcellus peak in 2014, when it sank $979 million into it. Since then, it has cut capital outlays way back, though it told investors late last year it plans to increase its Marcellus capital spending by more than 50% in 2017--to an estimated $625 million. That sum includes a $50 million equity investment in pipelines.
Click on the image at right to see a chart of Cabot's historic and projected capital spending in the Marcellus Shale.Unlike crude-oil producers, who received very high prices for their product in 2014 until the market collapsed, gas producers have battled soft pricing for years. Across the U.S., gas production has soared, overwhelming demand growth and leading to weak pricing. And most analysts expect the gas glut to continue, despite the start of exports of liquefied natural gas (LNG) and rising demand growth from the Power and Chemical Processing industries. For more on that, see December 16, 2016, article - ABB Forecast: Natural Gas Prices to Stay Low.
Investors also predict weak pricing for natural gas in 2017 and 2018. Gas futures prices traded on the New York Mercantile Exchange (NYMEX) show expected gas prices stuck in a narrow range of between about $2.86 and $3.60 per million British thermal units (MMBtu) for 2017 and 2018.
Click on the image at right to see historic, and predicted, prices for natural gas at Henry Hub, Louisiana.Producers in the Marcellus have been forced to take significantly lower prices for their product, sometimes as much as $1 per MMBtu less than cash prices at Henry Hub due to constrained outbound transportation capacity in the Marcellus. Cabot offsets that by using hedges to lock in prices for its product, but even using those instruments the company was only able to get about $1.75 per thousand cubic feet (Mcf) of gas in the third quarter of 2016, down 13% compared to the third quarter of 2015, the company said in its third-quarter 3016 earnings statement.
"The volatility in commodity prices continues to challenge our industry and has driven us to be more efficient," said Dan O. Dinges, Cabot's chairman, president and chief executive, in the company's third-quarter earnings statement, released October 28, 2016. "We have been successful at creating a free cash flow positive investment program that still generates growth, while simultaneously driving down our cost structure and our resulting breakeven levels."
In a shot at regulatory agencies, Dinges added, "While our impatience with the regulatory pipeline approval process is very real, it has not impacted our focus on prudently managing this business for the long-term as evidenced by our results this quarter."
Cabot is still in business because cost management is in its DNA. The company is one of the lowest-cost producers, if not the lowest-cost producer, in the Marcellus. In a late-November 2016 industry conference, Cabot officials said they had lowered drilling costs per foot of lateral in the Marcellus 40% since 2014. Completion costs per stage have dropped 54% since then. And the company has slashed direct lease operating expenses 68% in the Marcellus since 2014.
Aggressive cost management has helped trim losses in recent years. For the third quarter of 2016, the company reported net losses of $10.3 million on revenue of $310 million. In the comparable year-earlier quarter, when Cabot received an average of $2.02 per Mcf of gas, it lost $15.5 million on revenue of $305.3 million.
"Cabot has been doing what it can--aggressively managing its costs and signing up new customers--while waiting for market conditions to improve and waiting for regulatory and court decisions on its proposed pipelines," said Jesus Davis, Industrial Info vice president of research for the Oil & Gas Production, Pipelines and Terminals. "Its pipeline investments look like a smart play--we hope the courts and regulators agree."
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
