Tuesday, November 3, 2015

Natural Gas: The Economics Weaken (COG; EQT; RRC; SWN)

Off a fraction of a penny, $2.25 on the front month. Here's the last couple week's action:

From Barron's Income Investing:

Economics of Marcellus Shale Production Weaken
It’s not just crude.

Persistently low — and falling– natural gas prices are weakening business prospects for natural gas in the Marcellus Shale region, which includes parts of Pennsylvania, West Virginia, Ohio and New York. Big producers there are EQT (EQT), Southwestern Energy (SWN), Cabot Oil & Gas (COG), Range Resources (RRC), Antero Resources (AR).

A new report from Fitch Ratings finds that pricing remain weak, which is instigating companies to slow production growth forecasts for 2016. That should ultimately benefit the producers. Fitch analysts write:

At current economics, continued growth could heighten financial risk and limit future value creation, and supports producers move to slow production growth in 2016.
However, declining production means less volume for their infrastructure partners, often structured as master limited partnerships (MLPs).

Given strong liquidity, most producers aren’t going to suffer credit downgrades even as they reduce production. Plus, some like Antero, EQT, and Range Resources have hedged positions, which will help profitability. Fitch notes Antaro’s hedges are particularly strong.

Fitch concludes:

In the medium term, the combination of falling rig counts, improving takeaway capacity, and diminishing efficiency gains should provide pricing support for Marcellus producers. This will likely support credit profiles by improving reserve development prospects, encouraging volume growth, and ultimately, increasing cash flow.
Finally, here’s some of the pricing detail in the report:...MORE
Natural Gas: EIA Weekly Supply/Demand Report