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Shale gas drillers to keep 2021 capex flat under investor focus, analysts say

Industry observers are expecting shale gas producers to stick to their promise to keep capital spending restrained as investors continue to keep an eye on the sector's performance.

Shale gas drillers have had a history of matching their capital spending to the strength of gas prices, but often when they exceeded guidance, their stock performance dropped as investors walked away, according to S&P Global Market Intelligence data. As the shale gas sector set a combined capital guidance of approximately $5.39 billion for 2021, a decrease from the $6.04 billion actually spent by producers in 2020, the shale gas space saw its stock performance slightly recover, but still remain below the levels achieved in 2016 to 2018.

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Moody's in an April 14 research note projected that exploration and production companies will hold their total capital spending flat during the year as they aim to pay down debt, enhance free cash flow and boost shareholder returns — factors which have long since been in the center of investors' focus, especially after the sweeping capex cuts that occurred in the first half of 2020 due to a sharp drop in oil prices and the impacts of COVID-19.

Among the shale gas drillers, Pennsylvania dry gas producer Cabot Oil & Gas Corp. on its fourth-quarter earnings calls has already laid out plans to return more free cash to its shareholders during the year. Meanwhile, fellow Appalachian gas giant EQT Corp. has said that it will keep its 2021 spending flat but will prioritize paying off debt to regain its investment-grade credit rating before sending any cash to shareholders.

"Sustained underinvestment together with a gradual recovery in operating cash flow and energy demand will keep oil and gas production volume growth low in 2021," Moody's analyst Jonathan Teitel said. Production is forecast to increase merely 3% and investment-grade companies are anticipated to see slightly higher growth compared with speculative-grade producers, Teitel said.

In upcoming conference calls of exploration and production companies, Truist Securities Inc. oil and gas analyst Neal Dingmann on April 12 said to listen in on which drillers will reveal increases in recent activities.

"Rig and frac activity levels continue to remain stable as most [exploration and production companies] practice what they preach regarding capital discipline as completion activity for our coverage group is back to nearly 70 after reaching 100+ in early [February] versus as much as 150 early last year. Our data continues to also show fewer rigs now running for our group at 174 recently versus 188 rigs early this year," Dingmann said.

The Marcellus/Utica shale regions are expected to only see an additional one to two rigs, while the Haynesville Shale could see around two to three more rigs by year-end, Goldman Sachs analysts said in a separate April 8 note.

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