The stocks of Appalachia's shale gas producers were crushed during second quarter's earnings announcements as the companies' gas production volumes collided head-on with growing volumes out of Louisiana's Haynesville Shale and a glut of gas from shale oil wells in the Permian Basin.
The value of an equally-weighted index of Appalachian shale gas stocks lost 24% in roughly a month's trading between July 12 and Aug. 8, during which the producers reported their second-quarter results. Over the last 12 months, that same basket of stocks has lost 82% of its value.
Despite making wrenching changes to slow spending and generate positive cash flows, the Appalachian drillers appear to be tied in investor's minds to the future price of natural gas — a price that does not climb above $3/MMBtu for the next three years, according to the latest NYMEX futures strip, because more natural gas keeps pouring into the commodities market while demand stays relatively flat.
"Natural gas prices have weakened as legacy natural gas (Haynesville) activity has remained elevated and associated gas production [Permian] ramps," Goldman Sachs analyst Brian Singer told clients Aug. 6. "We note that the Haynesville Shale rig count has remained robust this year, driven primarily by private, [private equity]-backed operators."
The solution is for Appalachian and Haynesville producers to step on the brakes, according to Sanford C. Bernstein analyst Jean Ann Salisbury. "We believe that price must force these two basins to not just stop growing, but decline from today to their beginning-of-year level and keep them there going forward to make storage balance. We think this takes a price in the $2.25/Mcf range."
Most Appalachian producers put 2020 guidance off until this third quarter, but many have already started dropping rigs in response to low prices. Utica Shale driller Gulfport Energy Corp. said it will drop its only Utica rig in the second half, while Marcellus Shale driller CNX Resources Corp. said in its second-quarter announcement that it will go from five rigs to two in 2020 as part of a 33% cut in its drilling budget. CNX Resources lost 3%, the least amount of value of any Appalachian driller, during the summer gas stock meltdown.
"After two quarters of mixed messaging, we think investors were looking for a clear plan on CNX's future production growth and free cash flow generation," Jefferies LLC shale oil and gas analyst Zach Parham told clients after CNX released earnings July 30. "A more capital efficient budget than expected in 2020 and CNX opting to hold production flat in 2021 to generate [free cash flow]."
Southwestern Energy Co., whose stock has lost 30% of its value since July 12, was quickest off the block, coupling its Aug. 7 second-quarter earnings announcement with a plan to drop three of its five Appalachian rigs before the end of this quarter.
At EQT Corp., the nation's largest gas producer by volume, a five- to seven-rig drilling program is under new CEO Toby Rice's microscope with a new drilling — and new spending — plan expected in the third quarter. Analysts are predicting almost certain cuts in the Pittsburgh producer's rig count.
"Given that the 2020 gas strip has moved close to $2.50/Mcf and that new management sees less than 50% of EQT's current future development schedule set up for optimal development, we think EQT will slow activity levels and generate little growth in 2020," Jefferies oil and gas analyst Mark Lear said. "While we await long-term guidance from the new management team, we reduce our 2020 production growth estimate to 1%." Lear said he was ready to cut his estimate of EQT's production even further if gas prices do not improve.
Salisbury said that as long as crude prices stay above $50 per barrel and keep Permian oil drilling in business, gas prices and gas stocks could be spending the next four to five years in the cellar waiting for more LNG demand to build. "As long as oil remains in the $50-$70/barrel Brent range, the next few years look grim for something that many producers would give away for free."