Shares in pure-play gas drillers have seen double-digit percentage gains since the March oil crash. Investors trust that associated gas from Texas shale oil wells is dropping, balancing an oversupplied gas market and pushing futures prices up by more than two-thirds for winter 2021.
Although there is market chatter that current commodity prices could more than double to the $4/MMBtu range this winter, that price requires a number of factors to fall into place. Wall Street analysts instead are telling clients that gas prices in the $3/MMBtu range are already baked into the stock prices that ran up significantly over the past three months for shale gas exploration and production companies, or E&Ps.
"We believe our natural gas stocks rallied too soon, too far," Stifel Nicolaus & Co. shale gas analyst Jane Trotsenko told her clients May 15. She said fundamentals do not justify the gains that shale gas stocks have seen.
"The recent rally could partially be a function of investors playing the associated gas shut-in theme, which is expected to reduce associated gas supply and boost near-term natural gas prices," Stifel said, but the brokerage and investment banking firm noted 4.3 Bcf/d of gas has already dropped out of the market and spot prices at the benchmark Henry Hub barely budged. "In short, shut-in theme is not materializing as expected."
Investment bank Tudor Pickering Holt & Co. downgraded some of the superstars of the shale gas world — Appalachian drillers EQT Corp., Cabot Oil & Gas Corp. and CNX Resources Corp. — to "Hold," saying share prices now incorporate the anticipated winter price gains.
"While we still see upside for the equities longer term, near-term macro headwinds (LNG demand collapse) and the repricing of the 2021 natural gas curve to ~$2.70 at strip, hovering around our fundamental macro target, may cause equities to flat line for the remainder of the year," Tudor Pickering Holt said May 11.
In order for gas prices and equity values to move higher, LNG demand has to come back into the market, gas for power generation needs to stay steady, oil production must slow even further, and finally the shale gas drillers must break free of their history and not start drilling new wells to capture any marginal price gain, Bernstein & Co. LLC gas analyst Jean Ann Salisbury said May 15.
Bernstein outlined a possible starting point for $4/MMBtu gas: oil production cuts are deeper than the market expected. "If we lose another 1 million barrels per day this would take out another 2.5 Bcf/d of associated gas, and would likely require more than the Haynesville/Marcellus can deliver," Bernstein said. This would lead to renewed attention to older shales such as the Fayetteville and Barnett.
The key to preventing an upsurge in supply that might unbalance the winter market would be spending discipline on the part of Haynesville and Marcellus shale drillers, Salisbury said. "On the most recent earnings calls, that was definitely the mantra for most of the Appalachian E&Ps, but this has pretty much never worked, and we highly doubt the more private-centric Haynesville E&Ps will have reason to hold back," she said.
The signal to heed is the gas rig count. "If by year end this is still the tone and we haven't seen rigs, we may rethink!" Salisbury said.