From Pittsburgh Business Times

A new wave of belt tightening ushered in 2019 among natural gas producers in the Appalachian basin.

Publicly traded companies who are among the region’s biggest producers — EQT Corp., Range Resources, CNX Resources Corp. and Southwestern Energy Co. — have all said within the past few weeks that they will be spending less on drilling this year compared to last year. There are varying reasons for this, including the price for natural gas that drives a lot of corporate decisions. But another big factor is that Wall Street is looking askance at more capital costs at this stage of the Marcellus and Utica shale development.

An example: Free cash flow was mentioned 116 separate times in the four companies’ fourth-quarter earnings calls over the last two weeks, mostly by the executives themselves, according to a review of the transcripts on SeekingAlpha.com.

“Investors have been clear in their request for capital discipline from E&P companies, and most companies’ spending plans have moderated as a result,” said Range Resources Corp. CEO Jeff Ventura in a conference call with analysts last week. “We believe this is the right direction for the industry, and it makes sense for many E&P companies given their stage of development.”

Gone are the days of multibillion-dollar budgets for drilling. Range (NYSE: RRC) allocated $1.15 billion for its drilling, mostly in the Marcellus, as recent as 2017. It will spend $756 million this year.

“Oil and gas companies are increasingly coming under pressure to spend within their means, meaning within operating cash flow generated,” said Paige Marcus, an equity analyst at CFRA Research in New York. “Growth for growth’s sake is no longer acceptable for investors – they want to see profitable growth, or else management should spend more conservatively.”

Southwestern Energy (NYSE: SWN), which like Range is based in Texas but whose operations are mostly in Appalachia, also acknowledged the industry’s new focus in its latest conference call with analysts.

“There’s a great deal of industry chatter about capital discipline and returns-focused investment,” said CEO William Way. “At Southwestern Energy this is nothing new and it has been a demonstrated part of our culture for the last three years.” In 2018, for instance, Southwestern’s cash flow was $1.35 billion, $100 million more than it spent in capital. Marcus said she doesn’t think Southwestern will have positive free cash flow in 2019, although the company said in a conference call that it expects to return to free cash flow over the next two years.

CNX Resources Corp. (NYSE: CNX) disclosed the floor of its capital spending, which will be between $750 million and $800 million for 2019 compared to $794 million in 2018. CEO Nick DeIuliis noted CNX wasn’t about growing production to hit a target and said CNX would be deliberate and analytics-based when it comes to spending further. It’s poised this year to make a decision on whether to spend a potential billions of dollars over the course of years on a full-scale drilling for its deep Utica assets.

Even the biggest independent natural gas producer in the country, downtown Pittsburgh-based EQT (NYSE: EQT), is reducing its capital budget. It spent $2.7 billion in 2018, more than budgeted and $300 million more than the $2.4 billion in 2017. EQT expects to spend between $1.85 billion and $1.95 billion in capital in 2019, which still is more than any other publicly traded company in the region.

EQT CEO Rob McNally told analysts in February that the company had gotten the operational issues that caused the higher capital spend in 2018 under control in the fourth quarter with $134 million in free cash flow. It overspent its budget and increased capital spending in the middle of last year.

“I am more confident than ever that EQT will deliver sustainable free cash flow to shareholders in 2019, and for many years to come,” McNally said.

Range, however, did something that other peers weren’t able to accomplish: It underspent its $941 million 2018 capital budget by $20 million on the strength of drilling efficiencies and water recycling. Range is planning to spend $756 million this year, which will be well within cash flow.


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