The shale gas revolution is over and Appalachia's top producers need to radically change their behavior if they want to survive, according to former EQT Corp. CEO Steve Schlotterbeck.
"The biggest problem facing the upstream industry, frankly, is the industry itself," said Schlotterbeck, who created the nation's largest natural gas producer by volume with the merger of EQT and neighbor Rice Energy in November 2017. "The shale gas revolution has been an unmitigated disaster for any buy and hold investor."
Speaking at Petroleum Update's 2019 Northeast Petrochemical Conference in Pittsburgh, Schlotterbeck said upstream producers must change their orientation away from production growth that has swamped the market to delivering yield for their investors. Slashing drilling efforts to the bare bones while paying a healthy dividend with free cash is the path forward, he said.
"The industry is self-destructing from the success of the shale gas technologies," said Schlotterbeck, now working as a special partner for energy at M&A advisory firm Stone Pier Capital Advisors LP. "They continue to believe that volume growth is necessary for them to be successful, although we now have several years of data that demonstrates the opposite."
Drillers continue to promise increased production despite strong signals from the commodities markets that more supply is not necessary. Since the kickoff of the shale boom in 2008, the price of the monthly NYMEX gas futures contract has declined 70%, dragging the values of shale gas stocks down with it, Schlotterbeck said.
Only one of Appalachia's leading drillers, Cabot Oil & Gas Corp., has seen its value increase in 10 years, up more than 200%, according to S&P Global Market Intelligence data. The rest have posted losses of 80% and 90% of their value, Schlotterbeck said. His analysis did not include New York's integrated natural gas company National Fuel Gas Co., which has drilling, pipeline and downstream gas utility units and has seen its share price increase more than 50% in 10 years. In the past five years, an index of the top 10 publicly traded exploration and production companies has lost 81% of its value, according to S&P Global Market Intelligence data.
"The technological advances developed by the industry have been the cause of its slow suicide," Schlotterbeck said. "There will be a reckoning and the only question is whether it happens in a controlled manner or whether it comes as an unexpected shock to the system."
Although shale gas drillers have dialed back their production forecasts from phenomenal to moderate, any growth may kill the industry, Schlotterbeck said. "The fact is that every time they put the drillbit into the ground they erode the value of the billions of dollars of previous investments they have made," he said. "The handcuff the upstream companies need is the dividend. Once you establish the dividend, Wall Street loathes reducing it."
Schlotterbeck predicted that other shale drillers would roll back their activity to follow the first mover. Within one to two years, the gas commodity market would see prices move up to the $3.00/MMBtu to $3.50/MMBtu range as the current oversupply is corrected. At that price point, gas is still affordable for users and it becomes profitable for producers, Schlotterbeck said.
One the sidelines of the conference, Schlotterbeck would not say which way he would vote his remaining shares of EQT in a proxy fight between the current board and an activist group led by the Rice family who became shareholders as a result of the 2017 merger. He said EQT's nomination of three executives with upstream experience to the board was something he had hoped to see, and he credited the Rice group's pressure toward the change.