An anticipated spike in natural gas prices this winter is restoring the bond market’s confidence in the ability of America’s pure-play shale gas drillers to pay off their debts, an S&P Global Market Intelligence analysis found.
In early March, as the winter of 2020 was ending with warmer-than-expected weather across the country, putting a damper on commodity gas prices, bond traders were losing faith in the ability of shale gas drillers to generate enough cash to pay off their bonds in 2025. A 2025 bond for the United States’ largest gas producer, EQT Corp., traded for just under 64 cents on the dollar March 9, with other drillers seeing their debt trade at a 50% discount or more.
Most other shale gas exploration and production companies, or E&Ps, with the exception of investment grade-rated National Fuel Gas Co., took a dive in the first weeks of March only to recover as the price for gas delivered in winter 2021 nearly doubled as oil producers announced drastic production in the face of demand destroyed by the COVID-19 pandemic.
With less shale oil being produced, analysts predict a comparable drop-off in the natural gas associated with those oil wells, with some seeing the possibility of more than 10 Bcf/d of gas supply evaporating from a roughly 90 Bcf/d market.
“Despite a well-supplied summer 2020, as we move into winter we maintain our view that U.S. gas prices still need to rally significantly from current levels in order to incentivize lower demand and higher supply in the face of expected declines in associated gas production,” Goldman Sachs commodity analyst Samantha Dart told clients May 13. “As a result, we maintain our 2020/21 winter and 2021 summer NYMEX gas price forecasts at $3.50/MMBtu and $3.25/MMBtu, respectively.”
The May 13 closing price of the NYMEX gas futures contract was $1.616/MMBtu for gas delivered in June at the benchmark Henry Hub in Louisiana, rising to almost $3/MMBtu for January 2021.
“A number of the Appalachia E&Ps have upcoming maturities the markets were concerned with and the gas price rally, driven by expected associated gas production declines, better positions them to refinance those bonds coming due and buys them time to execute debt reduction plans,” Charles Johnston, senior credit analyst for energy with credit research firm CreditSights, said May 13. “A potential natural gas rally to $2.50-$2.75 gas is a difference maker for EQT, and we have since seen the 2021 strip move from ~$2.25 to ~$2.70. This has driven a $450 million swing in 2021 free cash flow projections to ~$300 million.”
The three major credit rating agencies, which handed out sweeping credit downgrades across the sector in February and March, have not upgraded any company because the price hikes have not happened yet and shale drillers do not have a track record of conserving cash in the face of higher prices, preferring to spending cash to put more rigs in play and capture any price gains.
“How much gas producer discipline will there be? For the Haynesville, probably not much,” Sanford C. Bernstein & Co. LLC shale gas analyst Jean Ann Salisbury told clients May 14. “The Appalachia E&Ps are all saying conservative things about not ramping up at these price levels, but we’ll see. Our current assumption is that the Marcellus/Utica will grow by 4 Bcf/d in 2021, and that many rigs will return end of this year.”
Bernstein hiked its 2021 gas price forecast May 13 to $3/MMBtu from $2.25/MMBtu.
Read it from S&P Global – Photo as posted on S&P Global
