Credit risks mounting for US gas producers, S&P Global Rating says

New York — Deteriorating conditions in US natural gas markets this year are posing growing credit risk to the industry's producers and even midstream developers, S&P Global Ratings said Wednesday.

In an industry outlook webcast, ratings analysts at S&P said that recent supply gains, weaker expected demand growth and lower prices in 2020 are putting new pressures on the gas trade.

In the US upstream, low prices have created the biggest risk for individual producers.

On Monday, S&P downgraded its credit rating on six of Appalachia's most prolific shale gas producers. It also adjusted its credit outlook to negative on eight of nine Appalachian producers under its review.

"Downgrades were driven primarily by refinancing risk ... upcoming debt maturities and lack of unsecured [debt] market access," Ben Tsocanos, director at S&P Global Ratings said.

Tsocanos also highlighted the difficulty that deteriorating commodity and capital market conditions pose for producers looking to sell gas-weighted assets. Even for integrated, multinational producers like Chevron, recent gas asset sales have resulted in sizeable write-downs and quarterly impairment charges.

PRICES

After falling below the $2/MMBtu threshold just over two weeks ago, Henry Hub gas prices have remained mired near four-year lows this month. On Wednesday, the cash market was trading nearly flat at $1.85/MMBtu, preliminary settlement data from S&P Global Platts shows.

Worse still for gas producers are prices in the forward market, which portend more gloominess in the months ahead.

At market close Tuesday, balance-2020 prices at the benchmark US hub settled at just $2.07/MMBtu with February, March, April and May calendar-month contracts now valued at less than $2/MMBtu, Platts M2MS forwards data shows.

In a recently revised price outlook presented by Tsocanos Wednesday, S&P Global Ratings sees US gas prices averaging $2.25/MMBtu this year, rising to just $2.50/MMBtu in 2021.

MIDSTREAM

Commodity, capital market and equity price pressures now facing many upstream exploration and production companies, and particularly natural gas-weighted producers, have created some mirrored risks in the midstream market, ratings analysts on the Wednesday webcast said.

Heightened counterparty risk and slower production growth figure among the biggest challenges faced by midstream developers, according Michael Grande, senior director at S&P Global Ratings.

With many of Appalachia's dry gas producers now facing prices below estimated breakeven values in the upper-$1/MMBtu area, analysts and market observers have raised concerns about the potential for rate concessions in the midstream market.

On its third-quarter earnings call, executives at TC Energy dismissed specific questions about the financial health of the company's own Appalachian producer customers, saying that its top 10 midstream contract holders had high pipeline utilization rates and strong acreage holdings.

Additional, but unrelated, factors that could pose a challenge, especially for Appalachia's midstream gas industry this year, stem from both regulatory and environmental risks.

"Whether the 2020 election changes administrations, I think isn't going to matter in terms of weighing on the future growth of the industry" Grande said.

Following a halt to construction work on the 2 Bcf/d Mountain Valley Pipeline in October, major capacity expansions across the US Northeast appear largely on hold for now.

The MVP project isn't alone. Indeed, the fate of at least four other projects, including the 1.1 Bcf/d PennEast Pipeline, the 1.5 Bcf/d Atlantic Coast Pipeline, the 500 MMcf/d Northern Access Pipeline and the 650 MMcf/d Constitution Pipeline, hangs in the balance, awaiting a resolution to regulatory hold-ups.