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Investors warm to Appalachian gas drillers that limit spending, buy back shares

Investors reacted positively to the first-quarter results of Appalachia's publicly traded shale gas drillers, sending six of the 10 issues higher after their earnings announcements showed capital discipline and plans to use asset sales for debt reduction or share buybacks.

The market rewarded Utica Shale driller Gulfport Energy Corp.'s plans to double its planned repurchase program using the proceeds from an expected sale later in 2018 of its $390 million stake in oilfield services company Mammoth Energy Services Inc. Gulfport shares gained 14% from the May 8 market close, just before the earnings announcement, through May 11.

"Capital discipline is alive and well," analysts at energy investment bank Tudor Pickering Holt & Co. said May 11. "The vast majority of operators are pledging to stick to their capital plans despite a rising crude price, with only a few names potentially pulling the lever to add more activity."

"When examining the winners, there appears to be little discretion between what play they operate or market capitalization," SunTrust Robinson Humphreys analyst Neal Dingmann said May 10. "What is noticeable is that nearly all the best performers had solid leverage/are quickly working on getting there." Dingmann noted that most producers' stocks have plenty of room to run higher after two years in the doldrums.

Shares in the country's largest natural gas producer by volume, EQT Corp., added 8% after the company's April 26 earnings announcement, where it said its reorganization into separate midstream and upstream companies will cut $1 billion in debt at the upstream parent using payments from its affiliated master limited partnerships for midstream assets dropping down into the MLPs.

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The benefits of asset sales went well beyond EQT's reorganization of the jumble of companies and partnerships after November's merger with Rice Energy. Several operators, such as Chesapeake Energy Corp., indicated that they would continue selling leases their rigs would not touch for years. Tudor Pickering Holt analysts said they "saw increased rhetoric on asset sales as operators continue to core up positions and show a willingness to monetize assets that may be too far down the inventory line."

Chesapeake, which gained 13% after its May 2 earnings announcement, also benefited from seeing its cash flow turn positive for the first time in two years as it reined in spending. "Many of our companies have begun to become free cash flow (FCF) positive or we estimate should become FCF-positive before 2018 year end," SunTrust's Dingmann said. Chesapeake, EQT, Range Resources Corp. and Antero Resources Corp. all benefited from limited spending, higher production volumes and higher oil prices, which boost NGL prices, according to SunTrust.

Despite the benefit of higher production, shares in Antero, the top U.S. NGL producer, lost 4% after the company's April 25 earnings announcements as investors wait for a special committee of the board to decide what should be done about Antero's stake in its affiliated midstream MLP, Antero Midstream Partners LP. CreditSights analyst Brian Gibbons said the midstream issues need resolution before Antero announces a buyback.

"We continue to believe the company recognizes that key parts of its discount are its relatively high leverage and midstream structure, and that any shareholder friendly moves will be done after it achieves its leverage goals," Gibbons told his clients May 3. "Beyond these issues, the company's strong hedge book at 100% on gas for 2018 and 2019 at $3.50/Mcfe plus ample firm transportation provides low risk for investors concerned with near- and intermediate-term gas market fundamentals."