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Marcellus shale drillers drop 25% of their rigs in 2019; more laydowns to come

After peaking in the first quarter of 2019 at 74 rigs, the number of active horizontal shale gas drilling rigs in Appalachia's Marcellus and Utica shales dropped 18% through mid-August, with several shale gas drillers signaling they plan to lay down more rigs in 2020.

The decline is partly due to exploration and production companies cutting spending for the year. It also represents the impact of front-loading capital spending into the first half of the year. With commodity natural gas prices stuck at $2/MMBtu inside the basin and a futures strip predicting prices of $2.50/MMBtu or less for almost all of 2020, Appalachia's shale gas drillers have little incentive to boost production in a market that is glutted.

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While the number of rigs in the Utica Shale in both Pennsylvania and Ohio nudged up 13% for the week ending Aug. 15 when compared to the first quarter's average, according to Enverus Drillinginfo's Aug. 15 RigData report, the number of Marcellus Shale rigs in West Virginia and Pennsylvania dropped 25% from the first quarter to 44 by mid-August. When compared to the second quarter of 2018, there are 8% fewer Marcellus rigs in operation and 15% fewer Utica rigs, RigData said.

"With fewer capex dollars to spend in the second half of 2019, and first half activity already lower than 2018, it's reasonable to think that Appalachian activity will fall even further," market analysis firm BTU Analytics LLC said Aug. 7. "For each operator outside of [Cabot Oil & Gas Corp.], these Appalachian [exploration and production companies] are forecasting growth below what they have achieved in recent years," BTU analyst Matt Hagerty said. He said he expects the costs cuts from rig reductions to continue into 2020.

Already, driller Gulfport Energy Corp. has taken its only rig out of the Utica and CNX Resources Corp. executives said in their second quarter earnings conference call that it was ready to cut its active rig force from five to two in 2020 if prices stay low.

Appalachia's and the nation's largest gas producer by volume, EQT Corp., is in the middle of a 100-day evaluation period mandated by incoming CEO Toby Rice to give the company a top-to-bottom review with an eye to cutting costs. Rice has promised guidance for 2020 when that review is complete, early in the fourth quarter.

Jefferies LLC is modeling that Range Resources Corp., Southwestern Energy Co., EQT and Gulfport will be "all running near maintenance capex programs in 2020 (limited exit[-to-]exit growth), and we estimate our Appalachia coverage group will add just ~0.5 Bcf/d of exit/exit growth in 2020 vs 2.3 and 0.5 Bcf/d in 2018 and 2019, [respectively]," Jefferies LLC shale gas analyst Zach Parham told his clients Aug. 22.

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