Just in Time - Chesapeake Counters Gas-Price Nadir With Output Slash, Innovative Inventory Build

Faced with sustained sub-$2/MMBtu natural gas prices and dim prospects for significant gas-demand growth until sometime next year, a number of major gas-focused E&Ps have been tapping the brakes on production and trimming their planned 2024 capex. But one company — Chesapeake Energy, slated to become the U.S.’s largest gas producer thanks to a recently announced acquisition — has taken a more dramatic step, implementing a novel strategy that will slash production by 25% but leave the E&P ready to quickly ramp up its output as soon as demand and prices warrant. In today’s RBN blog, we’ll review the 2024 guidance of the major U.S. gas producers and delve into the analysis of Chesapeake’s unusual approach. 

Natural gas prices have declined severely over the past two or three weeks, and a few days ago (February 20) the March contract settled at $1.576/MMBtu. In nominal dollars, that was the lowest front-month price since the summer of 2020, but in real, inflation-adjusted terms it was the lowest price of the 21^st century. The primary culprits are record-high production, which reached 106 Bcf/d in December 2023, combined with one of the mildest winters since the 1950s in many major U.S. heating markets. As a result, gas-storage levels are now more than 25% higher than the five-year average.

Lower natural gas prices are having a predictable impact on gas producer profits and cash flows. Although a couple of smaller producers have yet to report Q4 2023 results, the seven large gas-focused E&Ps that we monitor reported year-end pre-tax operating income and operating cash flows down 86% and 67%, respectively, from Q4 2022. Although their remarkable focus on investment discipline and operational efficiency have allowed producers to stay in the black, the continuing decline in natural gas prices in Q1 2024 threatens further erosion in profitability — and in the cash-flow generation that funds the modest shareholder returns some companies in the gas-focused peer group have managed to sustain.