After spending much of 2016 stacking rigs and laying offworkers, some shale gas drillers are coming off the bench in response to gasfutures prices above $3/MMBtu, with $4/MMBtu gas possible in 2017 as demand brieflyoutstrips production, Sanford C. Bernstein & Co. analysts said.
But a $4 handle would be "a short-lived window ofopportunity," they said, as the combination of the mighty Marcellus Shaleand Haynesville and Fayetteville shale production adds volumes to drive pricesback down.
Right now, according to Bernstein's calculations, there arehalf the number of "Marcellus-equivalent" rigs working in the U.S. —52 — as are needed to keep supply flat over the next 12 months. Forits Marcellus-equivalent calculation, Bernstein calibrates rig counts tocompare with production in the powerful northeast Marcellus.
Shale gas production, which is prone to rapid declines inthe first two years of a well's life, will keep falling as producers conservecash while export demand is growing, the analysts, led by Jean Ann Salisburyand Bob Brackett, said in a Sept. 28 note to clients. This should reinflateprices, they said, possibly above $4/MMBtu.
"Even factoring in the significant inventory ofdrilled, uncompleted wells and curtailed production awaiting new pipelinestartups in the Marcellus, production will fall in 2017," the analystssaid. "We therefore believe that 2017 may offer a short-lived window ofopportunity for gas investors."
"We believe that gas E&Ps have stayed on thesidelines despite a price recovery as they await 7 Bcf/d of Marcellus takeawaycapacity in 4Q17," they wrote. "We expect that rig count will surgemid-2017 as operators prepare to fill new pipelines. This will put the lid backon gas price and ensure the rally comes to an end — but if we don't see asignificant rise in rig count by mid-2Q, the price rise may be more sustained."
The analysts said they are bullish on three Marcellus shaledrillers in the fourth quarter. As natural gas storage levels surpass4 Tcf, and gas equities presumably fall in reaction to the overabundance,Bernstein has outperform ratings on Cabot Oil & Gas Corp., and
Buying Williams Cos. Inc. and , which have hugegathering, processing and transportation activities in Appalachia, is anotherway to play the price spike, Salisbury and Brackett said.
Futures prices on Sept. 28 lent credence to Bernstein's view;the 2017 Henry Hub strip was priced at $3.150/MMBtu, while the 2018 strip haddeclined to $2.942/MMBtu, according to SNL Energy data.