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Forward curve shape disincentivizes near-term Appalachia gas production growth: executives

Highlights

Necessary time to add production does not match expected run of high prices

Range Resources plans to maintain current production levels into 2022

With forward curve data suggesting that the current high price environment will deflate by mid-2022, Appalachia gas producers do not have a real incentive to increase production in the foreseeable future, Range Resources executives told investors at the company's third-quarter earnings call Oct. 27.

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"We fundamentally don't believe the market is indicating that Appalachian producers need to grow in the near term," Range's chief operating officer, Dennis Degner, said, highlighting the mismatch between the time needed to get new wells online and how long forward curves predict high prices will last.

The full process of bringing new production online can take between nine and 12 months, Degner noted, with a potentially much longer timeline if additional infrastructure is needed to bring that gas to market.

"When further considering that a well only recovers approximately 15% of the EUR during the first 12 months, the remaining 85% receives a price that is much different than near-term months," Degner added.

Higher prices, higher production?

One of the central questions for US gas markets going into the third-quarter earnings season is whether higher prices might incentivize some producers to relax strict capital discipline and announce guidance for increased production.

Spot gas prices in Appalachia have seen a bullish climb over the last six months, with all pricing locations trading above $5/MMBtu in recent sessions (Oct. 25-27).

So far, Marcellus and Utica gas production has remained steady through the price run-up, according to Platts Analytics data. Month-to-date October production for both basins has averaged 33.2 Bcf/d, around 100 MMcf/d lower than June production levels.

In the case of Range Resources, any production increases next quarter will be minimal, according to executives. Earnings statements show that the company's dry gas production averaged around 1.5 Bcf/d in the third quarter, up just 47 MMcf/d from the second quarter and around 60 MMcf/d lower from the third quarter of 2020.

Weaker forward curve

While winter 2021-22 forwards show the same kind of buoyancy currently displayed in the cash market, prices are expected to fall towards the $3/MMBtu level starting in April 2022, according to S&P Global Platts Analytics M2MS forward curve data for regional benchmark Eastern Gas, South.

This lower price environment is anticipated to continue through winter 2022-23, with the season's typical highest demand months, January and February, remaining below $4/MMBtu. The 2023 forward curve continues the trend, with most of the year in the $2-$3/MMBtu range.

For the quarter ended Sept. 30, Range had a net loss of $350.27 million ($1.44/share) compared with a net loss of $748.79 million ($1.98/share) in the year-ago quarter.