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Soaring NGL prices lifted Appalachian drillers' 2017 revenues

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Soaring NGL prices lifted Appalachian drillers' 2017 revenues

For some of Appalachia's top gas drillers, revenues from natural gas liquids more than doubled in 2017 as oil-linked prices for the commodity surged more than 50% during the year.

While the region's NGL production volumes increased only modestly compared to 2016 levels, price increases of up to $23 per barrel boosted the revenues of companies such as Antero Resources Corp., according to an S&P Global Market Intelligence analysis of full-year 2017 earnings reports.

Antero, second only to Range Resources Corp. in production volumes for the year, earned $870.4 million from NGLs in 2017, rising 101% over prior-year levels. Closing the year with 26% NGL production growth, the company remains on track to achieve its target of 20% NGL production growth annually for the next five years.

This strategy would allow for greater exposure to upside in liquids pricing, which gives Antero the budget to drill wells with a high rate of return and generate free cash flow, CEO Paul Rady said during the company's Feb. 14 earnings call. Antero's liquid stream makes up 40% of its product revenue.

With the liquids upside, Range expects a third of its 2018 revenue to come from NGLs, executives said on a Feb. 28 earnings call. "If [West Texas Intermediate crude pricing] were to average $60 over the five-year period versus strip pricing, which is closer to $54, Range would add an additional $700 million in cash flow over the next five years," Range COO Ray Walker said.

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Appalachia's biggest NGL producers, Antero and Range, posted earnings that exceeded Wall Street estimates in 2017. While its production numbers are not on par with the two giants, Gulfport Energy Corp. saw the largest increase in NGL revenues in 2017, at 130%, and reported normalized EPS of $1.41 for the year, beating analyst estimates of $1.35.

"When our expense reductions are coupled with the realized pricing uplift received from our liquids portfolio during 2017, largely driven by our liquids-rich SCOOP assets [in Oklahoma], we expanded our EBITDA margin by approximately 16% over 2016, increasing our overall corporate returns for the year," Gulfport Energy CEO Michael Moore said on his company's earnings call.

According to consensus estimates for southwestern Appalachia producers, production is anticipated to grow by 6.2 Bcf/d, priced at $3.07/Mcf to $3.09/Mcf with West Texas Intermediate crude at $60 per barrel, from the third quarter of 2017 to the end of 2019. Demand growth may spur local prices higher, as current strip prices may not be enough to support the expected level of growth, Walker said.

Tudor Pickering Holt & Co. analysts noted that ethane production increased by 163 Mbbl/d in 2017 and nearly doubled the growth rate in the previous year. Propane production grew by 61 Mbbl/d in 2017, compared to 15 Mbbl/d of growth in 2016. On the takeaway side, analysts at B. Riley FBR Inc. expect pipeline capacity expansions in the Northeast in 2018 to 2019 to result in improvements in realized prices.

NGL exports also saw a marked upturn year over year and are expected to continue growing as ethane export capacity rises in 2018. "As US production has surged, an increasing portion of NGLs have found a home in the export market: 37% production was exported in 2017, vs. 35% in 2016," the analysts said.

Range is set to take advantage of this trend. "A significant portion of Range's ethane and propane volumes are being delivered to premium market segments via Range's advantaged access to international destinations," Walker said.