US gas production rebound continues amid bullish growth outlook

Following an early February freeze-off, the outlook for US natural gas production now looks increasingly bullish as producers stage a surprisingly quick recovery amid a continued expansion in drilling activity.

On Feb. 22, early estimates showed US production at over 94.6 Bcf/d – a new seven-week high that comes following a prolonged contraction in output since the start of the new year when production tumbled from a record-high 95.7 Bcf/d average in December, S&P Global Platts Analytics data shows.

The new year decline, which historically is common in early January, has been exacerbated by widespread freeze-offs across Texas and the Midcontinent over the past seven weeks. The biggest hit to production came in early February as aggregate output briefly tumbled to just 85.8 Bcf/d amid steep declines in the Permian, Appalachia, the Haynesville, Denver-Julesburg and the SCOOP/STACK.

With the coldest days of winter now waning and the risk of further freeze-offs seemingly low, US gas production looks poised for continued growth over the coming weeks and months.

Over the next seven to 14 days, below normal temperatures should remain confined to the Gulf Coast and Eastern Seaboard states, according to the latest forecast from the US National Weather Service. Based on current projections, the biggest risk for a potential freeze-off is in Appalachia.

The US rig count meanwhile continues to set new pandemic-era highs almost weekly. As of mid-February, the total count current stands at 752 – its highest since March 2020, Enverus data shows.

Growth outlook

With producer margins at multiyear highs and forwards markets anticipating elevated gas prices to stick around, US operators have good reason to continue pushing the rig count higher this year.

As of January, half-cycle internal rates of return, or IRRs, in the most prolific US oil and gas basins are well above the minimum 25% required to incentivize new drilling and completion activity.

The Permian's Delaware Basin leads the pack with an IRR estimated around 55%, followed by the Eagle Ford and the Bakken at 53% to 54%. Returns in other major basins including Appalachia, the Haynesville, the Denver-Julesburg and the SCOOP-STACK range from about 35% to 45%, Platts Analytics data shows.

Elevated forwards prices are a key component of the recent strength in wellhead returns. At the Henry Hub, 2022 forward gas prices have rebounded recently after a brief drop below $4 earlier this month. As of Feb. 18, the balance-2022 forward strip at the benchmark location is priced at an average $4.51/MMBtu, S&P Global Platts' most recently published M2MS data shows.

According to Platts Analytics, the bullish fundamentals make for a compelling growth story for US gas production. By mid-summer, current forecast show average output surpassing 95 Bcf/d and climbing to the mid-96 Bcf/d range by late fourth quarter.

In its latest short-term energy outlook, the US Energy Information Administration projected more measured growth this year. While the EIA uses a slightly different methodology, they forecast US gas production would only surpass its December 2021 high at some time in first-quarter 2023.