US producer EQT cautiously optimistic on Appalachia, bullish on MVP pipeline

New York — The US' largest natural gas producer, EQT, said July 27 it plans to stay in maintenance-production mode over the next several years but remains cautiously optimistic on Appalachia's market outlook.

Over the balance of 2020, EQT is keeping its annual production guidance flat at 1.45 to 1.5 Tcfe as it looks to strengthen its balance sheet with continued reductions in development, drilling and frack fleet costs.

While the company has no immediate plans for future growth, it did restore to sales some 1.4 Bcf/d in output this month. Production from the Pennsylvania and West Virginia wells was previously curtailed in mid-May in a move that EQT credited to a weak commodity-price environment.

On the company's second-quarter earnings call July 27, CEO Toby Rice said the company isn't ruling out the possibility for future production curtailments, particularly during upcoming shoulder seasons when more price volatility is likely.

Still, as EQT recalibrates operations – from what it estimates has been a 4 Bcf/d drop in US gas demand led by the LNG, industrial and residential-commercial sectors – it sees cause for optimism.

Through the second-half of 2020, Rice expects a continued slowdown in oil-directed drilling and lingering uncertainty around oil pricing will keep a sizeable chunk of associated gas supply offline.

"With Appalachia and Haynesville rig counts dropping... combined with normal winter weather and rising industrial and LNG demand, gas supplies [could] be short heading into 2021," Rice said.

Hedging, curtailments

While EQT is fully hedged against price volatility in the cash market this year, the company is taking a wait-and-see approach for 2021, with just 40% of its production currently hedged.

"We believe the natural gas strip is undervalued," Rice told investors and analysts on the July 27 conference call.

By the winter months, EQT anticipates a stronger forward market to provide opportunities to lock in higher prices for next year. Beyond that, though, the company is weighing the flexibility value that unhedged production creates for possible, future production curtailments.

"We're going to see the pricing volatility every year in the shoulder seasons," Rice said. "So [shut in] opportunities are going to present themselves... as we deleverage our business, that gives us more flexibility to incorporate [these moves] into our base operating model."

Midstream developments

Recent cancellation of Dominion Energy's 1.5 Bcf/d Atlantic Coast Pipeline is giving EQT additional cause for optimism heading into 2021, when EQT's competing joint-venture project – the 2 Bcf/d Mountain Valley Pipeline – is expected to enter service, offering egress for Appalachia gas to more premium demand markets in the Southeast.

"Customers that signed up for that project are still looking for that gas and MVP is going to be a good outlet for that," Rice said.

Rice and other executives are currently in negotiation with shippers and end-users interested in acquiring EQT's firm transportation capacity, as they look to supply new gas-fired generation and LDCs in the Southeast.

Given the increasingly challenging environment for pipeline development in the Northeast, Rice expects MVP could be the last major production takeaway pipeline to be built out of Appalachia – a dawning reality that's likely to increase the value of MVP's capacity going forward.

For now, EQT plans to hold its MVP capacity as a hedge against potential basis dislocations in Appalachia, which have pushed cash prices at hubs such as Dominion South below $1/MMBtu – sometimes for extended periods. Considering its outlook for stagnant to possibly weaker Appalachian production over the near term, though, EQT appears more inclined to sell its MVP capacity – at the right price.