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Preview of Appalachian drillers' Q2 shows firms balancing costs, production growth

The first previews of Appalachia's spring show drillers tryingto balance production growth with disciplined spending and balance sheet preservation.

Antero ResourcesCorp. and Gulfport EnergyCorp. both released second-quarter operations updates results July 14,marking the outlines of how operations in the Appalachian shales progressed duringthe second quarter. Antero kept drilling like it was hurricane season 2008, whileGulfport hibernated until summer weather arrived in June.

Marcellus and Utica shale driller Antero lives in a universeof its own by virtue of a hedge portfolio that delivers a more than $2/Mcf bumpto its natural gas sales prices. Antero continued to be the most active drillerin Appalachia with seven rigs running in the plays, increasing production year overyear 19% in the second quarter to 1,762 MMcfe/d.

Antero's realized natural gas prices (71% of production) startedat $1.93/Mcf, 2 cents/Mcf below the average NYMEX price for the quarter, but thatrevenue was magnified by having 100% of its portfolio hedged to produce an averageprice of $4.31/Mcf.

Nevertheless, running the most rigs and pushing the productionenvelope has Antero spending more than it takes in, analysts noted. "All thingsconsidered, we believe [Antero] will continue to outspend cash flows," Guggenheimanalyst Subash Chandra told his clients in a note. "We estimate $450mm of outspendin 2017 (including midstream capex), relatively consistent with our previous $500mmestimate. Net debt/EBITDA is likely to remain around 3.3x through 2017, includinga $285mm working capital deficit."

Full second-quarter results will be posted Aug. 2 for Anteroand Aug. 3 for Gulfport.

"Investors/traders continue to have growth on the brain,despite management teams remaining conservative and guarded around their 2H16 and2017 outlooks," Wolfe Research analyst Bob Parija said July 14. "The marketmay want these companies to discuss growth, but companies are holding firm to outlooksthat suggest a lower for longer commodity outlook."

"We expect E&P management to strike a tone of flexibility;a balancing act," Nomura's Lloyd Byrne said. "The priority remains convincingthe market of Tier 1 asset quality and execution ability, translating into 2017-2018production potential, should commodities continue to stabilize."

Utica driller Gulfport Energy conserved its cash and didn't restartits frack crews until near the end of the second quarter. In spite of a late-inningrestart of production, Gulfport still posted production growth of 40% year overyear to 664.7 MMcfe/d, the bottom of its guidance.

Gulfport said its average realized price before hedging for allthree revenue streams of gas, oil and NGLs, was $1.81/Mcfe with a $1.44/Mcf gasprice. After hedging, Gulfport reported average prices of $2.53/Mcf for gas and$2.82/Mcfe for the full mix.

"Lower-than-expected production will grab attention, butdriven by effectively zero [wells turned to sales] in Q2," analysts at TudorPickering Holt & Co. said July 15. "Flat to down was company messagingin recent months which was fulfilled by (i) zero Q1 completions given crew restartedwork in April and (ii) all Q2 turned-to-sales activity occurring in last week ofJune."

Looking ahead to the bulk of Appalachian E&P earnings reportswhich come in the first week in August, Nomura's Byrne thinks that drillers willkeep buffing up their hedge books while focusing on trimming spending and unloadingdebt.

"We expect to hear about another quarter of incrementalhedging, particularly on the gas side of the ledger as both Marcellus and Haynesvilleoperators likely added to 2017 & 2018 protection," he told his clients."With the bounce in the commodities managements are (for the most part) stillfocused on balance sheets — optimizing portfolios, debt for equity swaps, divestingnon-core assets, acreage swaps, etc. We expect repositioning to continue throughout2H16."