Lower gas prices and a production glut in Appalachia aren’t deterring the biggest drillers in the Marcellus shale.
Companies continue to report surging production in their quarterly statements, and several are forecasting growth into next year.
Production is growing because drillers are finding more efficient ways to extract gas from shale formations. But in Appalachia, which accounts for the lion’s share of domestic gas production, a pipeline bottleneck has created a glut that is pressuring prices.
Spot prices at several Appalachian pipeline hubs spent the summer and fall $1 to $2 below the national benchmark of roughly $4 per million British thermal units. Lower prices have not hurt many of the big players or forced them to dial back production. But executives and investors are closely watching the dilemma created by oversupply and pipeline constraints.
“If prices crashed to $1.80, everybody would be hurting. But I don’t see that happening,” said Mark Marmo, president of Zelienople-based Deep Well Services, which completes wells for top Marcellus and Utica shale producers, such as Southwestern Energy, Range Resources and Chesapeake Energy.
Drillers that got into the shale play early enough to lease cheaper land and sign good deals on pipelines, or built solid infrastructure without going too deeply into debt, can power through another year or two until the oversupply goes away, executives and analysts predict. Cheaper land and deals are especially important because that would make the wells more economical.
“That’s really the main way you can get through it,” Stewart Glickman, an energy analyst in New York with S&P Capital IQ, said about increasing production. “Or you cut costs, or generate so much extra production that per-unit costs come down.”
And some companies have not had to worry about the economics of their wells. During quarterly earnings calls over the past two weeks, many companies said they still got between $3 and $3.50 from long-term contracts or agreements on pipelines that ship to more lucrative markets.
Range Resources, Southwestern and Consol Energy and some other drillers said they can maintain growth despite the lack of pipelines.
“Demand is coming,” said Jeff Ventura, CEO of Fort Worth-based Range, the state’s No. 3 producer. He and Cabot Oil & Gas CEO Dan Dinges pointed to pipelines coming online next year through 2018 that will help ease the glut. Others might have less luck.
“There’s going to be sort of a survival of the fittest occurring on who has liquidity and who has the acreage positions to stay on the production ramps,” said Nick DeIuliis, CEO of Cecil-based Consol. “Not everyone’s going to be able to do that, so there will be a supply response. We’ve seen it many, many times, and I don’t think this time will be any different.”
Drillers aren’t panicking, but investors are concerned about their plight.
All of the top 20 publicly traded shale gas producers in Pennsylvania saw their stock prices drop by double digits since early summer. Stock prices began to recover for most of the companies in mid-October, but several are still in a slump.Canadian firm Talisman Energy Inc., the No. 7 producer in Pennsylvania, saw its credit rating cut to one level above junk as it struggles with debt. Virginia-based Alpha Natural Resources is putting little effort into expanding its footprint beyond 20 working wells in the state while it deals with struggling coal sales.
Dallas-based Exco Resources, which has 121 working wells in the state, plans to drill only one to three wells in Appalachia next year.
“We’re very restricted on what the price we’re realizing up there is, so we’ll get $1.50 or so in a lot of acreage of our production,” COO Hal Hickey said during a conference call on results at Exco, whose stock dropped 53 percent since June.
State College-based Rex Energy’s stock had the biggest plunge among the top 20 producers — down 62 percent since spring. It will discuss earnings on Wednesday, but last month increased its expected production for 2014.
“These companies are valued on their ability to grow production, not on profitable production,” Glickman said.
Houston-based Cabot, the second biggest producer in the state, will cut one of its six drilling rigs from the Marcellus but predicts continued growth. Demand and prices will dictate whether that growth next year hits 20 percent of 30 percent, Dinges said.
Downtown-based EQT Corp., the fifth largest producer, plans to drill and complete fewer wells but still hit higher production goals with longer horizontal sections. It would consider shifting resources to the Utica shale if they become more economical, said Steven Schlotterbeck, an executive vice president at EQT.
Companies such as EQT, Range and Consol with a strong focus on Marcellus drilling and lots of infrastructure in place cut costs and increase production with each well they drill, said Michael Krancer, chair of the energy industry team at Philadelphia law firm Blank Rome.
“They know how to do business in this play,” he said. “Most companies are doing fine because the future has a huge upside with more pipelines.”
A slowdown could hurt the companies that contract with producers to permit, drill or complete wells. Unity-based Kennametal, which produces equipment for the oil and gas industry, lowered its outlook for the next fiscal year because it expects less drilling activity.
Several firms that contract with producers said they’re still hiring and planning for growth next year.
“We’re not slowing down,” said Deep Well’s Marmo, whose company posted record revenue the past two months.