Natural gas coming from Permian Basin shale oil wells will continue to cripple the chances of any significant commodity price increase over the next three years, S&P Global Ratings said Dec. 6, as it cut its gas price assumptions for credit ratings for the third time this year.
S&P clipped 25 cents per MMBtu from its 2020, 2021 and long-term price forecasts, lowering the price it assumes for credit ratings to $2.25/MMBtu, $2.50/MMBtu and $2.75/MMBtu, respectively.
The credit rating agency said it anticipates the price cut will force the downgrades of several pure-play shale gas producers, primarily in Appalachia, as Permian associated gas, produced as part of Texas crude production and completely unbound by any demand, continues to flood the market.
"We've taken numerous rating actions this year on some of our more gas-focused rated exploration and production issuers," S&P Global Ratings credit analyst Thomas Watters said. "However, we anticipate there could be additional rating actions due to this price deck change, especially for low-rated natural gas rated companies and those that are unhedged."
S&P Ratings downgraded three Appalachian shale producers — Gulfport Energy Corp., Range Resources Corp. and Antero Resources Corp. — in August and shifted its outlook on the nation's largest gas producer, EQT Corp., to negative after dropping the price outlook in July.
Natural gas supplies grew more than 8 Bcf/d this year despite a 31% drop in the number of gas-directed rigs, with a mild summer leaving gas vulnerable to falling below $2/MMBtu if winter proves equally mild, S&P Ratings said.
But the primary factor keeping gas prices down is Permian production, S&P Ratings emphasized. With oil prices stable or rising, those gas flows will increase as oil production climbs. Gas associated with oil and NGL production now accounts for roughly 50% of the gas coming to market, the rating agency said.
"Unfettered byproduct natural gas, which doesn't adhere to the laws of supply and demand, accounts for nearly half of U.S gas production," S&P Ratings wrote. "It is likely that undisciplined, Permian byproduct gas production, will continue to account for a significant percentage of gas-production growth in the coming years."
Appalachian producers cannot easily cut their output, hemmed in as they are by production hedges and pipeline transportation commitments, S&P Ratings noted.
And the demand side of the market equation shows little sign of moving to soak up the extra gas, S&P Ratings said. Exports, long expected to be a savior for the industry, has shown little growth as regulatory slowdowns in pipeline projects to Mexico and low global gas prices stall LNG terminal financing.
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