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Appalachian drillers expected to show signs of 'repair' amid Q2 losses


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Appalachian drillers expected to show signs of 'repair' amid Q2 losses

Most Appalachian shale producers are expected to reportlosses when they release their second-quarter earnings, but three drillers inparticular are best positioned to come out in the black, analysts said.

Analysts will be especially curious whether drillers in the Marcellusand Utica shales continue to hold production volumes flat while repairingbalance sheets by spending less capital. They will also want to hear aboutincreased hedging to take advantage of strip pricing that goes above $3/MMBtuin 2017 and alleviates ugly cash prices at Marcellus hubs.

The volume-weighted spot price index for Marcellus day-aheadgas averaged $1.32/MMBtu over the year to July 18, compared to the Henry Hub'sspot price of $2.35/MMBtu for the same period, according to SNL Energy data.

"2016 to date has featured harshly reduced capitalbudgets and declining volume outlooks," Jefferies LLC oil and gas analystJonathan Wolff told his clients July 18. "However, there has beensignificant balance sheet repair through a rash of equity offerings. We expectto learn of significant hedging additions (particularly for 2017 gas)."

The three best performers are expected to be the well-hedgedAppalachian pure-play driller AnteroResources Corp., the Utica Shale producer and thevertically integrated NationalFuel Gas Co.

Stifel analyst Michael Scialla likes the Appalachian gasdrilling group because he thinks gas prices are going up in 2017 as the marketrights itself after 2016's drop in drilling.

"We continue to believe declining supply and risingdemand will drive prices to $3.25 in 1Q17 and cause Street consensus to movehigher over the next 12 months given normal weather," Scialla said in aJuly 20 note. "Accordingly, we recently upgraded gas-weighted [] to buyand continue to recommend [Antero], [Gulfport] and []. Longer term, pricesabove $3.25 are likely to attract additional investment and reverse theproduction decline."

Only National Fuel Gas, Antero and Gulfport are expected tobook adjusted profits for the second quarter, according to S&P Capital IQconsensus estimates, as the three are seeing better average price realizationsfor their production volumes.

Guggenheim Securities analyst Subash Chandra said improvedpricing for gas and liquids has him expecting Gulfport to report adjusted EPSof 10 cents for the second quarter, 2 cents below consensus. "Post-hedgegas prices beat our estimate by 3% due to a higher than expected hedge benefit,as the unhedged differential was level with our estimate at 26% off of NYMEX,or $0.51," Chandra said after Gulfport released its quarterly operationalupdate July 14.

Antero Resources' second-quarter results are set to benefitagain from the driller's strong hedge position, which has delivered averageprices well above the NYMEX curve.

"Natural gas price realizations including the effectsof hedging averaged $4.31/Mcf, down 5% QoQ but up 12% YoY," CreditSightsanalyst Brian Gibbons told his clients July 18. "The company has reducedwell costs, with current costs of $0.9 million and $1.04 million per 1,000 feetof lateral in the Marcellus and Utica, respectively, marking a 24% decline from2015 levels and a 5% and 9% sequential decline in each area."

Gibbon expects to see Antero report adjusted earnings of 14cents per share, 3 cents better than consensus.

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National Fuel Gas is expected to report 63 cents per sharein adjusted earnings for its fiscal third quarter, according to analystssurveyed by S&P Capital IQ, a 15% improvement over the 55 cents in adjustedEPS reported in the corresponding quarter of 2015. While the company'sSeneca Resources Corp.E&P unit will still produce most of National Fuel Gas' revenue, owning itsmidstream operations and a gas utility buffers the company from exposure to gasprices, S&P Global Market Intelligence equity analyst Christopher Muir saidJuly 19.

"In last year's fiscal Q3 (calendar Q2), thenon-E&P businesses generated $0.35 per share. This will likely increasesomewhat in this year's fiscal Q3," Muir said. "One of the thingsthat benefits NFG's utility and midstream businesses are their location in theMarcellus. It is much easier for this company to build laterals from their ownpipes and attach gathering systems from the dry portions of the Marcellus inwhich their utility territory is located."

SouthwesternEnergy Co. kicks off earnings season for this group of companiesafter market hours July 21.

S&P Capital IQ andS&P Global Market Intelligence are owned by S&P Global Inc.