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Massacre in the mountains: Appalachian drillers spurned after Q2 results


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Massacre in the mountains: Appalachian drillers spurned after Q2 results

The stocks of the top 10 Appalachian shale gas drillers were clobbered in the weeks after announcing second-quarter results, signaling investors' impatience with spending today for growth tomorrow.

While the market firing squad seemed to pick and choose its Permian shale oil victims, all 10 of the largest publicly traded Appalachian drillers saw their stock prices drop between the July 27 kickoff of earnings season for the group and the market close Aug. 10.

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"The sting of [second-quarter 2017] reporting season will linger for a long time," Wolfe Research LLC oil and gas analyst Josh Silverstein said Aug. 9. "A lot of market cap and investor confidence was lost even as the crude oil forward curve improved to ~$50/bbl."

The future may be even gloomier as natural gas prices stay range-bound between $2.50/Mcf and $3.00/Mcf while producers drill away any margin, Silverstein said. "Marcellus and Haynesville [initial production] rates greater than 35 MMcf/d? Check. More gas coming out of the Permian? Check. Six month delay to the Cameron LNG facility? Check. Not a good season for the natural gas price outlook."

There was no single mortal sin — outspending cash flows, missing expectations and lower-than-expected prices all played roles — for gas drillers. Investors instead seemed to be washing their hands more than a decade into the shale revolution.

Market darling Antero Resources Corp., with all its gas production hedged above $3/Mcf and plenty of pipeline capacity out of Appalachia, watched its shares plunge 14% from July 27 to Aug. 11, despite cutting its losses by 99% year over year, to $5 million. Even Pittsburgh's blue-chip exploration and production, EQT Corp., with a balance sheet sturdy enough to buy up neighbor Rice Energy Inc., handily beat analysts' profit expectations on higher production and prices and delivered a promise to be cash flow positive by the third quarter. Its shares dropped 6% from July 27 to Aug. 11.

In the critical-care ward is Marcellus pioneer Range Resources Corp. Range's shares dropped off the table during earnings season, losing almost a quarter of their value during earnings season. The company missed expectations by a penny and narrowly undershot production expectations. Company CFO Roger Manny tried to put some lipstick on Range's performance by saying during an Aug. 2 conference call that the company's high-quality wells and data are "on sale" at the stock's present discount.

Even Cabot Oil & Gas Corp., one of the few shale gas drillers that is cash flow positive with growing production, has seen its stock price slip slightly since earnings season began.

It may be time for oil and gas drillers to mature with their industry, at least one analyst said. Just as some politicians still behave as though oil and gas were scarce, so do executives at production companies, and that mindset needs to change, according to Guggenheim's Subash Chandra.

Oil and gas are in excess, he said in an interview, and shale drillers need start behaving like mature companies, not upstart wildcats focused on growth. Production and reserve growth are obsessions from a hydrocarbon-starved past, Chandra said, while the present requires steady hands that multiply value and give something back to the investor.

"We were pleasantly surprised to hear Range echo the 'return of capital' strategy this quarter, although they did not commit to a time frame," Chandra said in an Aug. 8 note to clients. "Top relative performance by companies such as Cabot and ConocoPhillips suggest to us that 'return-of-capital' is preferred against outspend or cash flow neutrality.

"This reflects a perception that the oil and gas industry is mature, so growth and investment is not rewarded as before," Chandra said. "More companies may need to revisit their capital plans, to make room if possible for share buybacks or dividend growth. At the very least, cash flow neutrality is an intermediate goal. This would be helpful to market sentiment as a perception of scarcity may return to oil and gas markets if there is a pronounced period of underinvestment."