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Analysis: Low prices, investor pressure drive slowdown in Appalachian gas production

Highlights

December production falls over 1% to 33.1 Bcf/d

Dominion South Bal-2020 averages less than $1.80/MMBtu

Dry gas producer share prices fall sharply in 2019

Denver — Appalachian gas production last month registered its first monthly decline since May as producers in the dynamic US Northeast shale basin responded to low prices and growing pressure from the investment community.

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In December, output across the Marcellus and Utica averaged 33.1 Bcf/d, having declined nearly 380 MMcf/d compared to the prior-month average, S&P Global Platts Analytics data shows.

Last month's slowdown comes amid sustained low gas prices in the region.

In the fourth quarter, cash prices at the Appalachian benchmark Dominion South averaged just $1.78/MMBtu, marking a two-year low and testing producers' margins for profit.

In the Marcellus, wellhead breakeven prices are currently estimated at $1.80/MMBtu; breakevens in Utica are even higher at $1.94/MMBtu, data from Platts Well Economics Analyzer shows.

Low gas prices aren't the only challenge producers are facing, though.

In 2019, some of Appalachia's biggest drillers saw company stock prices tumble as a skeptical investment community increasingly turns its back on the dry gas industry.

Southwestern Energy's stock price was roughly halved during the year, falling to around $2.30/share. Cabot Oil & Gas didn't fare much better with its own share price falling over 35% to the low $17s/share.

In response, executives at both companies addressed analysts and investors on recent third-quarter earnings calls, saying they would slow drilling this year in an effort to return more value to shareholders.

RIG COUNT

Mounting pressure on Appalachia's dry gas industry has seen producers there pull back on drilling in recent months. On Wednesday, rig count in the Marcellus and Utica was estimated at just 48 or its lowest in over three years, drilling data from Enverus shows.

The slowdown there appears to have accelerated in recent months too - likely tracking many producers' commitments to keep drilling at maintenance levels this year. In October alone, the Marcellus and the Utica shed 10 rigs from the field, equivalent to about 16% of the fleet there.

With balance-2020 forward gas prices at Dominion South currently trading at less than $1.80/MMBtu, the likelihood for a reversal to the recent downward drilling trend looks unlikely.

MIDSTREAM ACTIVITY

Yet another challenge to Appalachia's producers in 2020 comes from the recent pause in midstream growth.

Following a halt to construction work on the 2 Bcf/d Mountain Valley Pipeline in October, major capacity expansions across the US Northeast are largely on hold for now.

The MVP project is now targeting an in-service date in late 2020 as the developers face legal challenges to the pipeline's non-FERC permits and, more recently, a 4th US Circuit Court of Appeals stay involving its Endangered Species Act authorizations.

Recently, developers of the 1.1 Bcf/d PennEast Pipeline requested regulatory approval for a two-year extension to place the project into service as it addresses legal challenges to permits and rights of way in New Jersey and Pennsylvania.

The fate of the 1.5 Bcf/d Atlantic Coast Pipeline, meanwhile, now hinges on a US Supreme Court ruling that must overturn a lower court decision that had blocked the project from crossing the Appalachian Trail.

Those projects aren't alone - two other smaller projects including the 500 MMcf/d Northern Access Pipeline and the 650 MMcf/d Constitution Pipeline have faced their own legal battles that have delayed construction and in-service dates.

-- J. Robinson, jrobinson@spglobal.com

-- Edited by Harry Weber, newsdesk@spglobal.com