Credit rating agencies lowered their outlook on two Appalachian shale gas producers Oct. 11, saying that continued low gas prices at the benchmark Henry Hub threaten expected cash flows at EQT and CNX Resources.
Fitch Ratings shifted its outlook on EQT Corp., the nation's largest gas producer by volume still rated as investment grade, to negative, citing concerns that EQT is looking at a long period of low natural gas prices due to associated gas coming from shale oil wells in Texas' Permian Basin.
"Henry Hub gas prices [year-to-date] have averaged approximately $2.60/MMBtu, with recent spot pricing dropping well below that to the $2.20-$2.30/MMBtu range," Fitch wrote. "Fitch expects that supply growth in natural gas (particularly associated gas in the Permian) will continue to constrain the overall gas complex, although reductions in capex budgets by Appalachian drillers should help the balance." EQT has yet to issue any spending guidance while it undergoes a 100-day review of its strategy and tactics following the appointment of Toby Rice as its new CEO in after a July shareholder revolt.
S&P Global Ratings moved its outlook on CNX Resources Corp., a smaller Appalachian driller, to negative from stable Oct. 11, also on concerns over low gas prices, both at Henry Hub and in local spot markets. "The company is outspending its internally generated cash flow by a wide margin this year to develop its southwestern Pennsylvania properties and build out its gathering and processing infrastructure," Ratings said. "We expect the company to reduce its spending next year and generate modest free cash flow after third-party midstream distributions."
Ratings lowered its natural gas price deck for credit ratings to $2.25/MMBtu on July 29 and warned investors it would be taking hard look at Appalachia's shale gas producers. It moved its outlook on EQT to negative on Aug. 30 after downgrading drillers Range Resources Corp., Antero Resources Corp. and Gulfport Energy Corp.
Spot gas prices inside the basin cratered in September, falling below $2/MMBtu at most points and staying stuck there. RBN Energy natural gas markets analyst Sheetal Nasta said the mild temperatures and drop off in demand from Dominion Energy Inc.'s Cove Point LNG plant while it undergoes scheduled maintenance have sent Northeast prices plunging on overwhelming supplies and slack demand.
"As of initial flow data on Friday [Oct. 11], small volumes had begun flowing to the facility, and the maintenance appears to be ending soon. The same maintenance event occurred at the same time last year, so it doesn't necessarily represent an anomaly compared with 2018. Nevertheless, losing 700 MMcf/d of demand for close to three weeks certainly didn't help what was already a bearish balance," Nasta told clients on Oct. 14.
As of the EQT's second-quarter earnings call, about 62% of EQT's dry gas production was hedged for the rest of 2019 with swaps or fixed-price sales at an average price of $2.85/MDth, the company said at the time. CNX during its second-quarter call said it had 78% of its expected production hedged at an average price of $3.01/MMBtu for the full year, $2.98/MMBtu for the third quarter.
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