Weak realized natural gas prices related to the ongoing supply glut from
the prolific Marcellus shale play may inhibit further production growth
there, according to Fitch Ratings.
Several key Marcellus producers appear to be lowering 2016 production
growth expectations relative to historical rates, driven by the impact
of sustained low prices on economics. The unhedged production-weighted
gas price for a sample of six Marcellus players in Q3 was $2.07/mcf, or
$0.67 below Henry Hub, for the nine months ending Sept. 30. Recent
quotes at the Leidy hub of $1.10/mcf are $1.00 below Henry Hub,
suggesting continued pricing weakness for Marcellus producers without
adequate transportation capacity to higher priced markets.
Marcellus producers continue to pursue lower costs and improved
efficiencies to remain competitive. However, in our sample of Marcellus
producers, production-weighted revenue or $2.07 per mcfe remains below
full-cycle costs, estimated at $2.50/mcfe. The narrowing gap between
revenue and half-cycle costs may be the catalyst for slowing growth as
producer revenues edge closer to cash breakeven costs.
In early 2015, producers appeared willing to temporarily run below
full-cycle breakeven in exchange for growth in production and proved
(1P) reserves. However, at current economics, continued growth could
heighten financial risk and limit future value creation, and supports
producers move to slow production growth in 2016.
Larger Marcellus producers (EQT, SWN, COG, RRC, AR) are not likely to
see significant near-term credit impacts, as low operating costs,
moderated growth expectations, adequate liquidity, large proved reserve
positions, and the ability to scale capex to cash flows should largely
insulate existing credit profiles from low prices.
EQT reported strong liquidity in the form of $1.7 billion in cash and a
$1.5 billion undrawn facility at Sept. 30. 2016. Hedge positions will
also provide some uplift for Marcellus producers that rolled in hedges
at higher price levels, including AR, EQT, and RRC, who have hedged
95-100%, 40-45%, and 50-55%, respectively, of 2016E natural gas
production. In particular, AR had a very strong hedge asset of $2.8
billion as of Sept. 30.
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.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
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