Wall Street analysts think the best news U.S. shale gas producers can deliver in their third-quarter earnings announcements is no news at all: no new spending, no production growth, no new debt. Instead, analysts want shale gas drillers to continue to play defense so they can fatten their cash flows on higher commodity prices this winter.
Still heavily in debt after years of outspending cash flows, producers are expected to use whatever small gains they can eke out of near-record low commodity prices this summer to keep paying down debt and revamping themselves into low-cost gas manufacturers.
"For natural gas we are bullish on Henry Hub gas prices during 2021 due to a sharp reduction in associated gas production," Goldman Sachs analyst Brian Singer said Oct. 15. "We believe dry gas producers will be more hesitant to ramp production in the event of a short-term positive price signal, largely because producers' weak balance sheets need to be replenished with larger cash positions."
"Expecting a relatively quiet quarter as upstream starts to stabilize operations after a dramatic shift lower in drilling and completion activity in Q2," analysts at energy investment bank Tudor Pickering Holt & Co. told clients Oct. 14. "A growing portion of the upstream industry is shifting towards an adoption of a business plan that calls for a reinvestment rate of 70-80% of cash flow allocated to the drill bit while capping growth longer term in the mid-single digits."
An exception may be if EQT Corp. uses its Oct. 22 earnings release and conference call to announce a rumored deal to buy some or all of supermajor Chevron Corp.'s Appalachian shale assets for $750 million. Chevron last year wrote off the $4.3 billion it spent buying into Appalachia in 2010 at the height of the shale gas boom. While EQT does not have much cash or room for more debt, it does have lots of available stock to pay for a deal. Chevron's acreage in Ohio and southwest Pennsylvania is adjacent to much of EQT's existing leasehold.
Chevron would not be the first to unload its Appalachian operations on a local operator at a discount to the buyer. New York integrated gas company National Fuel Gas Co. snapped up Royal Dutch Shell PLC's Pennsylvania operations for $541 million in May, after Shell spent billions drilling wells and laying pipelines in Pennsylvania's northern tier.
Goldman Sachs' Singer thinks EQT will play a conservative hand this quarter. "We believe that despite rising 2021 gas futures and still-higher Street expectations, there will be little interest in incremental production growth" expressed in gas-focused producers' third-quarter earnings reports, Goldman said. "While balance sheets remain challenged for most producers, even those where there is flexibility — [Cabot Oil & Gas Corp.] and EQT primarily — are likely to project conservatism until there is greater clarity on winter prices and post-winter gas storage levels."
In America's other big shale gas basin, Louisiana's Haynesville Shale, the situation is reversed. The basin's dominant driller, Comstock Resources Inc., is backed by deep-pocketed Dallas Cowboys owner Jerry Jones and is ready to spend money if an acquisition creates value, executives said on Comstock's last earnings call.
"We expect no discipline out of the Haynesville," Sanford C. Bernstein shale gas analyst Jean Ann Salisbury told clients Sept. 25. "It is primarily [private equity]-backed and not necessarily committed to the capital discipline. … Rigs have not fallen there to the extent they did in Appalachia and we expect a ramp to 40-50 and growth next year."