Houston — Appalachian-focused oil and gas producers are expected to report only modest gains in gas production in the first quarter of 2019 as they seek to hold the line on capital spending.
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In guidance issued toward the end of last year and earlier in 2019, most of the larger Appalachian Basin producers announced plans to scale back on capex spending on drilling, with an eye toward living within cash flow and increasing investor returns.
Southwestern Energy said it had reduced planned capital investment by $200 million compared with 2019 guidance, which the company had released when it announced the sale of its assets in the Fayetteville shale last September. The company's projected 2019 capex is also $120 million lower than 2018 capex.
In February, Range Resources announced a 2019 capex budget of about $756 million -- about 83% of its 2018 estimated capex budget. The company said it expects its full-year 2019 production to average between 2.32 Bcfe/d and 2.35 Bcfe/d, up only slightly from the 2.2 Bcf/d reported in 2018.
Appalachian producer CNX in recent guidance said it expects 2019 average production volumes of between about 5.5 Bcfe/d and 5.7 Bcfe/d, an annual increase of about 5%, compared with 2018 volumes from retained assets of about 5.3 Bcfe/d.
"Most of the companies said they expect to grow production at a modest pace while living within cash flow," Ben Tsocanos, S&P Global Ratings director of oil and gas, said in an interview.
The results of these decisions to slow capital spending in the basin have already begun to be evident in the first quarter of the year, reflected in the number of drilling permits issued in Pennsylvania.
Pennsylvania issued 35% fewer permits to drill wells in Q1 2019 compared with the same period of 2018. The state Department of Environmental Protection reports that 491 permits were issued in Q1 2019 versus 758 in Q1 2018.
DRILLING SLOWDOWN NOT YET SEEN IN MARCELLUS
However, the move to slow down drilling in the basin in 2019 is not yet being reflected in the rig count, particularly the number targeting the dry gas Marcellus shale play of northeastern Pennsylvania, data from S&P Global Platts Analytics shows. Producers in that region have been increasing the number of operated rigs fairly aggressively since the beginning of the new year, averaging 65 rigs year to date compared with 54 in 2018, Platts Analytics finds.
This contrasts with rig activity in the Utica Shale play, where the total number of rigs has been on the decline throughout most of 2018, with the trend continuing into the current year. The number of Utica rigs averaged 19 in 2018 and has averaged just 16 in 2019 year-to-date.
As Appalachian-focused E&P companies have sought to balance their projected production growth against their shareholders' expectations for returns, they have dialed back on their estimates for output growth in 2019 and the next several years, Sajjad Alam, Moody's Investors Service vice president and senior analyst, said in an interview.
"For example, at Antero [Resources] they were talking about 20% cumulative average growth to 2023, now they're saying for this year 16% to 20% growth, and beyond this year, it's more like 10% to 15%," he said. "Everybody is talking about more tempered growth."
The slower rate of production growth in the Appalachian Basin should help increase producers' price realizations over the longer term, Alam said. "Midstream takeaway capacity was out of balance for many years," he said. With a number of interstate pipelines having been built to transport gas out of the basin in the last several years, takeaway capacity is becoming better aligned with production, he said.
PRICE DISCOUNTS TO HENRY HUB TIGHTEN
Year to date, Appalachian production locations' basis to Henry Hub have tightened compared with the same period of last year, according to Platts pricing data.
Three main representative production locations in the Appalachian region -- Dominion South Point, Texas Eastern M-2 and Transco Leidy Line -- in 2018 averaged basis discounts of over minus 50 cents discount to Henry Hub.
So far over the course of 2019, these locations have traded at less of a discount, with Transco Leidy Line receipts averaging a minus 14.3 cent discount; Dominion South Point averaging minus 19 cents and Tetco M-2 basis emerging as the location with the widest discount this year, back 20.8 cents from the Louisiana benchmark.
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