Three low-cost Marcellus Shale natural gas producers are in thebest position to ride out a coming bump in the road and then thrive on improvednatural gas pricing in 2017, S&P Global Market Intelligence equities analystDavid Holt said in a July 18 research note.
Marcellus drillers RangeResources Corp., CabotOil & Gas Corp., and EQTCorp. all have positive cash flows due to low costs, ample liquidity,and no near-term debt due, Holt said, and will easily handle what he sees as a short-termcorrection in natural gas prices coming because of huge summer storage inventories.
Recapping the recent rally in natural gas prices, Holt said thecombination of hot summer weather and a squeeze on traders, who shorted gas whenHenry Hub prices hit a 10-year low at the end of 2015, pushed prices higher throughthe spring and early summer.
According to SNL Energy data, Henry Hub spot prices have beenon a tear since hitting a 2016 low of $1.490/MMBtu on March 7, gaining 81% throughtheir $2.695/MMBtu close of trading on July 18.
But the party is already starting to come to an end, Holt said,noting that prices have lost 6.7% since July 5 as storage inventories build. "Inour view, fundamentals still suggest oversupply as inventories remain at 3,243 Bcf.Additionally, inventories for peak injection season (summer months from April toOctober) are still expected to reach approximately 4,161 Bcf (EIA data), which wouldbe the highest October level on record. As such, adding to existing record levelscould suggest continued pricing pressures in the near-term," Holt said.
Holt agrees with Bentek Energy's prediction of $3.30/MMBtu averagegas prices in 2017, as more gas is used for power while the gas rig count sits atan all-time low of 89, off 94% from its 2008 peak of 1,606.
"We think this will eventually stabilize supply/demand dynamicslonger term," Holt said. "While we recognize low prices have motivatedsome producers to focus on existing inventories of backlogged wells versus new drilling(which will ultimately cap production), [Cabot, Range, and EQT] continue to remainresilient during troubled times. We think low cost producers that exhibit financialflexibility in 2017 … remain well positioned to navigate through the current commoditycycle."
Range and Cabot were Holt's top picks, followed by EQT.
Range's wells have a slow 19% decline rate, Holt said, makingit easy to hold production flat. The company also has $1.7 billion in liquiditywith no debt due before 2021, and 80% of its 2016 production hedged at $3.24/MMBtu,well above the NYMEX curve. "We think RRC continues to pull theright levers to operate in a challenging setting, and grow cash flow with its lowcost long-life asset base," he wrote.
Cabot's low 1.6x debt-EBITDA ratio, its $580 million in cashand $1.6 billion in untapped credit all translate to flexibility. "We thinkthese are the right ingredients to endure the current suppressed price environment,"Holt said.
EQT's flexibility is similarly impressive, and Holt thinks EQTis ready to pounce when prices head north. EQT has a debt-to-EBITDA ratio of lessthan 1.0x, $1.6 billion in cash, and $1.5 billion undrawn in its revolver.
SNL Energy and Bentek Energyare both units of S&P Global.