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Top Appalachian drillers stay optimistic even as NGL price cuts deepen

Some of the country's top oil and gas producers are adjusting their expectations and strategies amid a prevailing slump in natural gas liquids prices as they look forward to improvements in market conditions in the next few quarters.

NGL spot prices continue to dip steadily to 40 cents per gallon and below, from just above $1 per gallon a year ago. This decline particularly affected Appalachian companies, which had been focusing on liquids production to take advantage of the previous price uplift, according to analysts at SunTrust Robinson Humphrey Inc. It is also expected to force companies to reexamine their plans for 2020, the analysts said in a July 24 note.

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Analysts at BTU Analytics LLC said the price decline put propane, normal butane and isobutane at least 20% below their normal range, drying up revenue boosts from NGLs. "While it is true that wet gas production has exposure to NGL uplift from liquids, current pricing for NGLs does not promise significant economic improvement for wet gas play economics," the analysts said.

Goldman Sachs Equity Research analysts also lowered their outlook for growth on companies exposed to natural gas and NGL prices and shifted to a more conservative outlook for 2020 and 2021. For 2021, NGL prices are forecast at about 29% of West Texas Intermediate benchmark pricing, compared to the previous 35%. The new price forecast is expected to result in a 1% reduction in NGL production for 2020, according to a Sept. 5 note.

For all 10 of the biggest U.S. drillers covered by S&P Global Market Intelligence, NGL price realizations declined year over year, with some getting cut by almost half. In terms of revenue, only Antero Resources Corp. — the largest NGL producer in Appalachia and Encana Corp. saw increases in NGL revenue compared to the year-ago period, with the rest getting hit by the continuing price drop.

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Antero exported 55% of its NGL volumes during the second quarter, allowing it to benefit from a 19-cent-per-gallon premium to Mont Belvieu pricing, the company said in its earnings call. Antero attributed the improvement in price differentials to the startup of the Mariner East 2 NGL pipeline, on which Antero is an anchor shipper.

"The approximately 165,000 barrels a day flowing on [Mariner East 2] evacuates almost 40% of the basin's NGL supply," said Glen Warren, president, CFO and director of Antero.

However, Fitch Ratings recently downgraded Antero's credit ratings due to the low NGL and natural gas price environment, putting the company in a difficult spot because it is highly levered to NGLs compared to other Appalachian drillers.

Goldman Sachs also downgraded Antero to "neutral" from "buy," with the lower prices "driving lower cash flows in [2020 to 2021] relative to peers."

Fellow Appalachian driller Southwestern Energy Co. lowered its guidance for NGL realizations to 18% to 22% of WTI as a result of the price slump. Still, the company is maintaining a rosy outlook based on "the evidence of demand" from growth projects and investments to produce and bring NGLs to export markets, according to Southwestern President, CEO and director William Way.

Range Resources Corp. in its second-quarter earnings call also acknowledged the "challenging" price environment, which, like its Appalachian peers, also affected its strategy of leaning on NGL production.

However, Range also remains "cautiously optimistic," Vice President of Liquids Marketing Alan Engberg said during the call. "We're going into the third quarter now with fundamentals that are actually starting to improve."

Antero, Southwestern and Range executives all attributed the weak pricing primarily to limited export capacity on the Gulf Coast, despite increasing global demand for propane and butane. This is expected to improve in the fourth quarter and into 2020, as export expansion projects in the area come online, along with import and NGL production facilities beginning service in China, Europe and India.

According to Engberg, Enterprise Products Partners LP's Gulf Coast terminal project would add 175,000 barrels per day of export capacity and about 750,000 bbl/d of new capacity is expected to start up in 2020. Meanwhile, global demand growth for liquefied petroleum gas has been at roughly 5% over the last five years, and in the next five years, it will be at about 3%, Engberg said. Including the chemical sector, total demand growth through 2024 would be about 1.6 million bbl/d.

"[T]he world does want … the U.S.' exports," Engberg said. "The U.S. needs more export capacity, and you can argue, needs more supply."