Pennsylvania's largest shale gas producers — who have a history of increasing output to chase high futures prices only to register steep losses after glutting the market — continue to stick to low-growth, low-cost drilling plans even as natural gas prices surpass the $5/MMBtu mark.
Permits for shale gas wells increased 7% in September compared to the same month in 2020, when spot prices hovered around $1.90/MMBtu, but dropped 28% from the prior month, according to permitting data from the Pennsylvania Department of Environmental Protection accessed Oct. 6.
Well permits are a leading indicator of drilling activity in the state, and four of the state's five biggest producers — EQT Corp., Chesapeake Energy Corp., Range Resources Corp. and Southwestern Energy Co. — kept the pace subdued. The top five producers accounted for only 51% of the permits pulled in September, down from 53% in August. Normally, the top five drillers account for roughly two-thirds of permits pulled each month.
The only producer among the top five with a large year-over-year increase in permits was Cabot Oil & Gas, now named Coterra Energy Inc. after closing its merger with Cimarex Energy Co. on Oct. 1. Coterra told investors during its second-quarter earnings call that it planned to add wells to fill new pipeline capacity opening up as The Williams Companies Inc. brings the 580 MMcf/d Leidy South expansion of its Transcontinental Gas Pipe Line Co. LLC online in the northeast portion of the state.
Unlike its peers, Coterra will enter 2022 with no gas production protected with hedges that would clip the upside of the potential revenue generated by high prices this winter.
While the high prices at the benchmark Henry Hub are a sharp contrast from the rock-bottom revenues drillers eked out of the Marcellus Shale in years past, the curve of NYMEX futures prices drops off quickly when winter 2022 ends.
Toby Rice, the head of EQT, the nation's largest gas producer by volume, has said repeatedly that he will not add more rigs and cash to the Pittsburgh producer's business plan until seeing prices above $3/MMBtu for two to three years in the future.
Shale oil and gas exploration and production companies, or E&Ps, are looking beyond the high winter prices and biding their time, Truist oil and gas analyst Neal Dingmann told clients Oct. 7.
"While current $76.99 per barrel and $5.72/Mcf prices receive the attention, the more important prices for our companies are in the 12-month strip currently at $70.77/barrel and $3.97/Mcf," Truist said. "We believe the set-up for E&Ps puts the group in the sweet spot for making good on shareholder return promises, debt reduction and steady-state operations."
Pennsylvania's September data showed the shape of the Marcellus Shale play changing slightly as the big drillers stayed put and smaller, private producers focused on the liquids-rich window of the play in the southwest. Private equity-backed operator PennEnergy Resources LLC pulled six permits to drill in Butler County, Pa., just north of Pittsburgh, while family-owned driller Snyder Brothers Inc. pulled seven permits in its home of Armstrong County, Pa., just to the east of Butler County.