Released November 14, 2019 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Brief periods of unseasonably cold or hot weather have briefly boosted U.S. spot natural gas prices this year, but when the weather reverts to normal, so does the bleak outlook for natural gas prices.
Unseasonably hot weather in September pushed up spot gas prices by an average of 34 cents per million British thermal units (MMBtu), to an average of $2.56, according to the October Short-Term Energy Outlook (STEO) report from the Energy Information Administration.
But brief periods of cold weather in October failed to elevate prices. In fact, the EIA said on November 13 in its November STEO, average spot prices at Henry Hub fell 23 cents per MMBtu in October, to $2.33 per MMBtu. Prices did rise as Arctic cold gripped the U.S. in the early part of this month. Still, prices are about $1 per MMBtu less than the average price received during the fourth quarter of 2018, according to the EIA.
Because production growth continues to outpace demand growth, forecasters and investors are expecting sub-$3 per MMBtu prices for the next several years.
Click on the image at right to see investors' expectation and energy software-as-a-service (SaaS) and data analytics company Enverus' projection of average U.S. natural gas prices through 2024.
Strong supply growth this year has meant that strong demand growth was met while still allowing companies to store a lot of gas underground. Gas storage injections outpaced the five-year average, the EIA said, and the U.S. is going into the winter heating season with gas inventories at about 3.8 trillion cubic feet (Tcf), slightly above the five-year average.
U.S. dry natural gas production is expected to rise 10% this year, to about 92.1 billion cubic feet per day (Bcf/d), the EIA said. Even though low prices are expected to hold down production growth next year, the energy agency still expects production to average 94.9 Bcf/d, an increase of about 1.4 Bcf/d from EIA's October STEO.
The EIA projected annualized 2019 gas demand will average about 85 Bcf/d in 2019, which reflects seasonal demand lows of about 70 Bcf/d and highs of roughly 110 Bcf/d. The agency forecast 2020 annualized gas demand will barely budge.
Demand from electricity providers, who helped drive 2018's surge, is expected to moderate this year and next, the EIA said. A winter that is expected to be less extreme than last year is expected to restrain 2019 and 2020 demand growth from the residential and commercial sectors.
Click on the image at right to see the EIA's projection of gas demand.
"Aside from brief weather-driven blips, the outlook for natural gas prices continues to be weak," commented Jesus Davis, Industrial Info's research specialist for the Oil & Gas Production, Pipelines and Terminals industries. "Despite this, gas production and project activity continue to set record levels. It's almost like producers are in a game of 'chicken' and they're waiting for their competitors to blink."
"I would have thought that low prices would have cut into production growth and project activity by now, but that's not been the case for the last few years," Davis continued. "Despite finding about 5 Bcf/d of new demand for liquefied natural gas (LNG) exports this year, another 6 Bcf/d for pipeline exports to Mexico, a booming petrochemical sector that uses gas as a feedstock and the market-share gains of gas in the electricity business, the U.S. remains oversupplied with gas."
Click on the images at right to see graphics on U.S. pipeline sales to Mexico and LNG exports.
LNG prices have softened in recent years, driven in part by new competitors entering the market.
Gas found with oil, so-called associated natural gas, is one thing, Davis said: Producers capture and process it because they can made money off the crude oil. But for formations like the Marcellus and the Haynesville shales, which have relatively little oil, producers have two unappealing options: shut in production, which is anathema to producers, or produce it as long as the price received is greater than operating costs.
It appears some gas-oriented producers have made the hard choice to reduce production. In their third-quarter earnings calls, companies like Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) and EQT Corporation (NYSE:EQT) (Pittsburgh, Pennsylvania) indicated future production will be reduced, according to a recent article in The Wall Street Journal.
The decision might hurt those companies in the short term, but the cutbacks, if followed by other gas-oriented drillers, could reduce the yawning gap between gas supply and demand, which could push up prices.
However, producers are still producing more oil and gas with fewer rigs and less capital spending. How far that trend could continue is an open question, but some have noted a flattening of efficiency gains this year. Still, some gas producers, such as Cabot Oil & Gas Corporation (NYSE:COG) (Houston, Texas), expect to increase production next year despite plans to cut capital spending.
The third quarter wasn't pretty to gas-oriented independent producers. Chesapeake reported a $61 million net loss on $2 billion of revenue for the third quarter. Roughly 82% of its gas production took place in the Marcellus and Haynesville, and it received about $1.94 per Mcf of gas during the just-completed quarter. By contrast, Chesapeake received about $2.60 per Mcf of gas in the comparable year-earlier quarter.
In its November 5 earnings release, the company confirmed its full-year 2019 capital budget at between $1.3 billion and $1.6 billion, but cut planned capital outlays next year by 30%, to between $910 million and $1.1 billion.
EQT, which bills itself as the nation's largest independent gas producer, lost $361 million on $952 million of revenue for the third quarter, a sharp reversal from earnings of $63 million on revenue of $1 billion in the comparable year-earlier quarter, the company said in its October 31 earnings report. EQT slashed its third-quarter 2019 capital expenditures attributable to continuing operations to $475 million, down from $855 million in the third quarter of 2018. In 2020, the company said it plans to slash full-year capital expenditures by $525 million to between $1.3 billion and $1.4 billion.
Seven weeks before reporting third-quarter earnings, EQT announced a broad restructuring that would reduce staff by about 23%, or nearly 200 positions. The company operates in Pennsylvania, West Virginia and Ohio, in the Marcellus and Utica shales.
In announcing the staff cuts, Toby Rice, EQT's chief executive officer, said, "Today's action represents another significant milestone as we transform EQT into a modern, technology-driven and efficient natural gas producer. Following the addition of proven leadership and the establishment of our digital work environment, we evaluated the business and determined the appropriate 'future state' organizational structure."
Southwestern Energy Company (NYSE:SWN) (Spring, Texas) fared better than many peers, earning $49 million on revenue of $636 million for the just-completed quarter. But its revenue from gas sales fell 49% year-over-year, partly because it disposed of properties in the Fayetteville Shale in late 2018. Net of hedging, Southwestern realized about $1.87 per Mcf of gas sold in the just-completed third quarter, about 30 cents less than the comparable year-earlier quarter, it reported on October 24. Decreased commodity prices were partly offset by a gain from settled derivatives.
Southwestern Energy operates in Pennsylvania and West Virginia, in the Marcellus Basin. It said it aims to achieve cash-flow neutrality in 2020. Weary of years of fevered, expensive drilling programs that have not generated sufficient profits, investors increasingly are focusing on free cash flow from oil and gas producers. For more on that, see September 6, 2019, article - Free Cash Flow in the Marcellus: Cabot Oil & Gas vs. Range Resources.
Even low-cost leaders Cabot and Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas) took haircuts in the just-concluded quarter.
Low gas prices knocked about $100 million off Range's revenue stream in the third quarter, contributing to a net loss of $47.2 million. Results were improved by a $75 million gain in derivatives and asset sales.
For Cabot, a 25-cent-per-Mcf decrease in its realized gas sales prices during the third quarter helped cut quarterly earnings to $90.4 million on $429 million in revenue, down from $122.4 million of earnings on revenue of $545.2 million for the third quarter of 2018.
On their Oct. 24 earnings call, Cabot officials said the company was selling its interest in a pipeline for about $256 million, increasing its dividend 11% and cutting next year's capital budget by about $100 million, or 12%. Cabot expects to generate about $500 million-$525 million in free cash flow this year, roughly $200 million more than it generated last year.
When Range executives held their earnings call on October 23, they pointed out that, net of debt, the company had about $24 of proved reserves per share at 2018 strip prices. Yet the stock has remained stuck at about $4 per share, down nearly 90% from three years ago.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 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.
Unseasonably hot weather in September pushed up spot gas prices by an average of 34 cents per million British thermal units (MMBtu), to an average of $2.56, according to the October Short-Term Energy Outlook (STEO) report from the Energy Information Administration.
But brief periods of cold weather in October failed to elevate prices. In fact, the EIA said on November 13 in its November STEO, average spot prices at Henry Hub fell 23 cents per MMBtu in October, to $2.33 per MMBtu. Prices did rise as Arctic cold gripped the U.S. in the early part of this month. Still, prices are about $1 per MMBtu less than the average price received during the fourth quarter of 2018, according to the EIA.
Because production growth continues to outpace demand growth, forecasters and investors are expecting sub-$3 per MMBtu prices for the next several years.
Strong supply growth this year has meant that strong demand growth was met while still allowing companies to store a lot of gas underground. Gas storage injections outpaced the five-year average, the EIA said, and the U.S. is going into the winter heating season with gas inventories at about 3.8 trillion cubic feet (Tcf), slightly above the five-year average.
U.S. dry natural gas production is expected to rise 10% this year, to about 92.1 billion cubic feet per day (Bcf/d), the EIA said. Even though low prices are expected to hold down production growth next year, the energy agency still expects production to average 94.9 Bcf/d, an increase of about 1.4 Bcf/d from EIA's October STEO.
The EIA projected annualized 2019 gas demand will average about 85 Bcf/d in 2019, which reflects seasonal demand lows of about 70 Bcf/d and highs of roughly 110 Bcf/d. The agency forecast 2020 annualized gas demand will barely budge.
Demand from electricity providers, who helped drive 2018's surge, is expected to moderate this year and next, the EIA said. A winter that is expected to be less extreme than last year is expected to restrain 2019 and 2020 demand growth from the residential and commercial sectors.
"Aside from brief weather-driven blips, the outlook for natural gas prices continues to be weak," commented Jesus Davis, Industrial Info's research specialist for the Oil & Gas Production, Pipelines and Terminals industries. "Despite this, gas production and project activity continue to set record levels. It's almost like producers are in a game of 'chicken' and they're waiting for their competitors to blink."
"I would have thought that low prices would have cut into production growth and project activity by now, but that's not been the case for the last few years," Davis continued. "Despite finding about 5 Bcf/d of new demand for liquefied natural gas (LNG) exports this year, another 6 Bcf/d for pipeline exports to Mexico, a booming petrochemical sector that uses gas as a feedstock and the market-share gains of gas in the electricity business, the U.S. remains oversupplied with gas."
LNG prices have softened in recent years, driven in part by new competitors entering the market.
Gas found with oil, so-called associated natural gas, is one thing, Davis said: Producers capture and process it because they can made money off the crude oil. But for formations like the Marcellus and the Haynesville shales, which have relatively little oil, producers have two unappealing options: shut in production, which is anathema to producers, or produce it as long as the price received is greater than operating costs.
It appears some gas-oriented producers have made the hard choice to reduce production. In their third-quarter earnings calls, companies like Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) and EQT Corporation (NYSE:EQT) (Pittsburgh, Pennsylvania) indicated future production will be reduced, according to a recent article in The Wall Street Journal.
The decision might hurt those companies in the short term, but the cutbacks, if followed by other gas-oriented drillers, could reduce the yawning gap between gas supply and demand, which could push up prices.
However, producers are still producing more oil and gas with fewer rigs and less capital spending. How far that trend could continue is an open question, but some have noted a flattening of efficiency gains this year. Still, some gas producers, such as Cabot Oil & Gas Corporation (NYSE:COG) (Houston, Texas), expect to increase production next year despite plans to cut capital spending.
The third quarter wasn't pretty to gas-oriented independent producers. Chesapeake reported a $61 million net loss on $2 billion of revenue for the third quarter. Roughly 82% of its gas production took place in the Marcellus and Haynesville, and it received about $1.94 per Mcf of gas during the just-completed quarter. By contrast, Chesapeake received about $2.60 per Mcf of gas in the comparable year-earlier quarter.
In its November 5 earnings release, the company confirmed its full-year 2019 capital budget at between $1.3 billion and $1.6 billion, but cut planned capital outlays next year by 30%, to between $910 million and $1.1 billion.
EQT, which bills itself as the nation's largest independent gas producer, lost $361 million on $952 million of revenue for the third quarter, a sharp reversal from earnings of $63 million on revenue of $1 billion in the comparable year-earlier quarter, the company said in its October 31 earnings report. EQT slashed its third-quarter 2019 capital expenditures attributable to continuing operations to $475 million, down from $855 million in the third quarter of 2018. In 2020, the company said it plans to slash full-year capital expenditures by $525 million to between $1.3 billion and $1.4 billion.
Seven weeks before reporting third-quarter earnings, EQT announced a broad restructuring that would reduce staff by about 23%, or nearly 200 positions. The company operates in Pennsylvania, West Virginia and Ohio, in the Marcellus and Utica shales.
In announcing the staff cuts, Toby Rice, EQT's chief executive officer, said, "Today's action represents another significant milestone as we transform EQT into a modern, technology-driven and efficient natural gas producer. Following the addition of proven leadership and the establishment of our digital work environment, we evaluated the business and determined the appropriate 'future state' organizational structure."
Southwestern Energy Company (NYSE:SWN) (Spring, Texas) fared better than many peers, earning $49 million on revenue of $636 million for the just-completed quarter. But its revenue from gas sales fell 49% year-over-year, partly because it disposed of properties in the Fayetteville Shale in late 2018. Net of hedging, Southwestern realized about $1.87 per Mcf of gas sold in the just-completed third quarter, about 30 cents less than the comparable year-earlier quarter, it reported on October 24. Decreased commodity prices were partly offset by a gain from settled derivatives.
Southwestern Energy operates in Pennsylvania and West Virginia, in the Marcellus Basin. It said it aims to achieve cash-flow neutrality in 2020. Weary of years of fevered, expensive drilling programs that have not generated sufficient profits, investors increasingly are focusing on free cash flow from oil and gas producers. For more on that, see September 6, 2019, article - Free Cash Flow in the Marcellus: Cabot Oil & Gas vs. Range Resources.
Even low-cost leaders Cabot and Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas) took haircuts in the just-concluded quarter.
Low gas prices knocked about $100 million off Range's revenue stream in the third quarter, contributing to a net loss of $47.2 million. Results were improved by a $75 million gain in derivatives and asset sales.
For Cabot, a 25-cent-per-Mcf decrease in its realized gas sales prices during the third quarter helped cut quarterly earnings to $90.4 million on $429 million in revenue, down from $122.4 million of earnings on revenue of $545.2 million for the third quarter of 2018.
On their Oct. 24 earnings call, Cabot officials said the company was selling its interest in a pipeline for about $256 million, increasing its dividend 11% and cutting next year's capital budget by about $100 million, or 12%. Cabot expects to generate about $500 million-$525 million in free cash flow this year, roughly $200 million more than it generated last year.
When Range executives held their earnings call on October 23, they pointed out that, net of debt, the company had about $24 of proved reserves per share at 2018 strip prices. Yet the stock has remained stuck at about $4 per share, down nearly 90% from three years ago.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 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.
