Natural gas liquids prices for Appalachia's top shale drillers continued to rise through the early months of 2018 and companies are making NGL production a key part of their strategy to improve free cash flow.
The majority of the biggest Appalachian gas producers saw their realized NGL prices increase by more than 10% up to as much as 26% year over year, according to an S&P Global Market Intelligence analysis of the companies’ first-quarter earnings reports. Price uplifts for NGLs are connected to higher oil prices.
To take advantage of the price upside, companies are continuing to ramp up their production of the gas liquids. Leading the Appalachian pack is Southwestern Energy Co., which had the largest first-quarter NGL production increase and the highest NGL revenue boost at 38% year over year, reflecting the company's accelerated focus in liquids production.
The strategy is part of Southwestern's plan to become a pure-play Appalachian producer. In the first quarter, the company's Appalachian assets contributed $294 million to its EBITDA, making up 75% of Southwestern's consolidated EBITDA for the quarter. In addition to higher volumes, Southwestern raised its overall average realized natural gas price by 9 cents per Mcf during the quarter.
"The uplift we received from this improved liquids pricing is a key contributor to our increasing capital efficiency," Southwestern President and CEO William Way said during the company's first-quarter earnings call. "In other words, we are generating greater value for each dollar invested."
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B. Riley FBR analysts said Southwestern's increased capital allocation to its Appalachian production and subsequent exposure to liquids prices is expected to result in margin and cash flow benefits through 2020.
"Underpinned by increased capital allocation to its Southwest Appalachia rich [and] lean gas window acreage, we estimate liquids production to increase 30% year over year in 2018 and more than double by 2020 to around 100,000 [barrels of oil equivalent per day] from 45,000 [boe/d] in 2017," the analysts wrote in a research note.
Analysts at Stifel also view the growing liquids exposure as a way for Southwestern to diversify its income stream. "Growing liquids production could provide additional uplift to Southwestern's revenue … Liquids currently contribute 14% to Southwestern's revenue mix, but their share is expected to increase to 20% by 2021," Stifel analysts said in a May 22 note.
Similar to Southwestern, Stifel analysts said improving liquids pricing and higher volumes would boost Range Resources Corp.'s earnings. "Based on current forward curve pricing, liquids should account for 42% of total company revenue in 2018 and 44% in 2019," the analysts said. "Liquids diversifies the company's revenue stream and allows Range to deliver free cash flow despite low natural gas prices."
Antero Resources Corp., Appalachia's biggest NGL producer, is confident that NGL prices will remain attractive. The company saw a 20% year-over-year increase in NGL prices, which "remained consistent with expectations," according to Antero President and CFO Glen Warren.
Antero credited the NGL price rally to tightening inventories, increasing exports and a rise in global product prices. Warren also cited strong propane fundamentals and Mariner East 2 coming online to provide additional liquids takeaway capacity as key factors in the continuation of attractive liquids prices. Range President and CEO Jeffrey Ventura agreed, citing "robust demand" from China and Europe that will further drive NGL price increases, as well as new demand from ethane crackers coming online.
"I think exports are a big part of it, and we're able to benefit," Ventura said.
Stifel noted that 36% of Antero's revenue comes from liquids, but because of a lack of NGL hedges from 2019 onwards, the company will become more exposed to lower prices. This would make Antero's strategy to dial back on production growth and focus instead on cash flow neutrality more important than ever.
"Now that the playing field is to become level, we believe Antero will have to shift its focus from aggressively growing production to aggressively streamlining its cost structure," Stifel said.
