COVID-related demand destruction and the oil price meltdown have engulfed energy markets and companies in a thick, pervasive shroud of doom and gloom. But investors and analysts have hit upon a potential bright spot for one segment of the industry: Gas-Weighted E&Ps that had been battered by the decade-long shift of upstream capital investment to crude-focused resource plays. The massive cutbacks in 2020 capital investment by oil producers triggered by the recent, dramatic decline in refinery demand for crude will reduce not only oil output, but associated gas production as well. That drop in supply raises the prospect of meaningful increases in natural gas prices in 2021 –– hence Wall Street’s new interest in Gas-Weighted producers, whose equity values have taken off in recent weeks after a big plunge earlier this year. There’s a lingering concern though, namely that LNG exports — a key driver of gas demand for U.S. producers — may be slowed by collapsing gas prices in key international markets. Today, we discuss what’s been going on.
Over the past few years, associated gas production from the Permian, Bakken, Eagle Ford and other basins drove total supply growth that outpaced record growth in U.S. natural gas demand. The resulting imbalance steadily eroded Henry Hub prompt gas futures pricing to a recent low in the mid-$1.50s/MMBtu — a level not seen since 1995. The impact on the publicly traded Gas-Weighted E&Ps we track was dramatic, with the share prices of producers such as Range Resources, Southwestern Energy and Antero Resources plunging more than 95% through first-quarter 2020, from their 2013-14 highs. However, since April 1, share prices of the eight significant U.S. Gas-Weighted E&Ps — all Appalachia-focused — have risen sharply, with six of them more than doubling in price over the three-week period.
Note: This blog should not be viewed as investment advice. RBN Energy is not an investment advisor.
The shift in sentiment has been a long time coming. Although the Shale Revolution began in gas plays like the Barnett and Haynesville shales after the gas price peak in 2008-09, investment began shifting in a big way to oil-weighted resource plays as rising natural gas output triggered falling realizations. Intense development of the Permian and a handful of other oil plays with a lot of associated gas production intensified after the 2014-15 financial crisis. With natural gas prices depressed by soaring associated gas production that by definition is not sensitive to lower gas prices, the dwindling number of Gas-Weighted E&Ps became concentrated in the Marcellus/Utica, the most prolific and lowest-cost play. The recent plunge in natural gas prices to near 25-year lows triggered a headline-garnering $6.5 billion impairment of Marcellus assets by Chevron as well as write-downs by a multitude of other gas producers. That further convinced investors that these companies were in a fight for survival, not headed for growth. However, the prospective shift in the crude oil supply/demand balance triggered by the COVID-19 pandemic has swung the spotlight to E&Ps that have little-to-modest exposure to cratering oil prices. In today’s blog, we’ll take an in-depth look at these Gas-Weighted E&Ps, analyzing their strategies and financial performance to provide some insight into their growth potential under the possible new pricing scenario.
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