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Analysis: Drilling slowdown hits Appalachia's gas production

Highlights

Production at 33.3 Bcf/d, down 170 MMcf/d from November

Marcellus, Utica rig count off nearly 40% from March high

Denver — A commitment from Appalachia's natural gas producers to slow drilling activity in 2020 already appears to be taking its toll there, with December production levels likely to register their first monthly decline since May.

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Through Tuesday, modeled output across the Marcellus and Utica shales has averaged 33.3 Bcf/d this month, roughly 170 MMcf/d below the November average, data from S&P Global Platts Analytics shows.

The largest decline has come from Pennsylvania's northeast dry window, where sample production has fallen by more than 160 MMcf/d in December, or about 1.4% compared with the prior-month average. The state's south dry window has witnessed a 1% retreat in sample receipts over that same period, equivalent to about 60 MMcf/d. Smaller gains and declines in output have been reported from other production areas across the region.

Lower output from Appalachia this month tracks a recent acceleration in rig cuts there. In October, Marcellus and Utica producers pulled 10 rigs from the field, or about 16% of their fleet.

Enverus data shows Appalachia's aggregate rig count at 51 as of mid-December, down from 83 in March, when drilling activity stood at close to a previous multiyear high.

EARNINGS SEASON

During the recent third-quarter earnings season, some of the largest producers from across the US Northeast committed to dialing back production next year if the current low price environment persisted.

Southwestern CEO William Way told analysts and investors that the company would slow or even halt drilling activity if needed, highlighting the company's prior cuts in 2016, which were prompted by similar market conditions.

Executives from Cabot Oil & Gas and Range Resources also made commitments on recent earnings calls to keep production at maintenance levels in an effort to return more value to shareholders.

In earnings seasons past, Northeast producers highlighted their commitment to spending discipline and sustainable growth. Given the prolonged downturn in gas prices this year, though, and considering sustained weakness in 2020 forwards prices, a pause in Appalachia's seemingly unstoppable growth trajectory now seems increasingly likely next year.

PRICES

After briefly topping $4/MMBtu in March, prices at the Northeast's benchmark supply hub, Dominion South, have trended steadily downward, averaging about $1.90/MMBtu over the past eight months.

For next year, forwards markets are expecting much of the same, with the calendar 2020 curve currently priced at $1.85/MMBtu, S&P Global Platts M2MS data shows.

The current cash and forward price environment has raised serious doubts about producers' capacity to eke out a return on capital in Appalachia's dry basins. According to Platts Analytics, breakeven prices in the Marcellus this month stand at $1.80/MMBtu. In the Utica, the wellhead gas price required to break even is slightly higher at $1.94/MMBtu.

-- J. Robinson, jrobinson@spglobal.com

-- Edited by Bill Montgomery, newsdesk@spglobal.com

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