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Shale gas drillers cut some rigs, but Wall Street wants more to dropfrom SNL Energy Finance Daily Shale gas drillers cut some rigs, but Wall Street wants more to dropByline: Bill Holland Rig count data showed that America's shale producers shook off a call from Wall Street to cut natural gas production in 2023 as a way to bolster battered commodity prices. Shale gas drillers, particularly those in the Haynesville Shale on the Texas-Louisiana border, are ignoring the current oversupplied market by sticking with flat production plans, banking on the startup in 2024 and 2025 of more Gulf Coast liquefied natural gas export terminals that would boost demand, analysts said. "Operators are more focused on LNG exports in two to three years than excesses today," Benchmark Co. LLC oil and gas analyst Subash Chandra said in a March 13 note. "Yet the final investment decision of the various LNG projects in the pipeline is not a condition for growth." Chandra said the scheduled terminal starts can already be supplied with current gas volumes, and export terminals in a potential second wave have yet to receive final investment decisions. More Haynesville rigs need to drop During earnings calls covering the fourth quarter of 2022, Southwestern Energy Co., Comstock Resources Inc. and Chesapeake Energy Corp. each said they would drop two rigs in the Haynesville Shale. Those three companies are the largest public exploration and production companies, or E&Ps, in the Haynesville, which has the easiest access to the Gulf Coast's LNG export terminals. The Haynesville Shale was expected to see a 12% increase in gas volumes over April 2022, with a 3% increase already this year, according to the U.S. Energy Information Administration's March 13 "Drilling Productivity Report." In the large Appalachian shales, the Utica and the Marcellus, the EIA is forecasting a 1.6% year-over-year increase in April, with a 2.9% increase year-to-date. Goldman Sachs oil and gas analyst Umang Choudhary said more rigs need to be pulled from production, which would cut the amount of gas going to market, particularly in the Haynesville. "We need supply response from gas producers to balance the market headed for oversupply, given less robust secular demand in the near term, and strong production growth from oily shale basins," Choudhary wrote in a March 10 note. Goldman analysts estimated the U.S. market only needs 1.2 Bcf/d more of gas production this year. The EIA expected that by April, nearly half that number, 420 MMcf/d, will be produced. Goldman said there is a three- to four-month lag built into producers' reaction to commodity prices, but rig counts need to be reduced. "We believe further activity cuts would be needed, especially Haynesville activity, which needs to be reduced to ~50 rigs ... with associated cuts in completion activity to solve for a flat production profile from the Haynesville," Goldman said in the recent note. Rig data from Enverus Inc., an energy market data and software company, showed 66 rigs operating in the Haynesville on March 1, a 10% increase over March 2022, with private drillers accounting for 36 of those rigs. Enverus showed a 9% increase in Appalachian rig count, driven primarily by public and private operators increasing Utica rigs. Commodities fund manager: Buy on the dip Leaving aside the wild card of weather, the commodities and natural resources fund managers at Goehring & Rozencwajg Associates LLC said the 2023 gas market is already balanced with the return of Freeport LNG's Texas terminal after a June fire. "With Freeport back online, inventories should normalize given production is mostly flat," managing partner and portfolio manager Adam Rozencwajg said in a March 13 email. "As 2023 goes on, new LNG export terminals will come online. As a result, we shouldn't need production cuts to move the market into deficit." The Goehring & Rozencwajg team said now is the time to buy shale gas stocks, which they see as undervalued in light of future global LNG demand and the flat spending profiles of U.S. E&Ps. "When the global markets swung from 'structural surplus' to 'structural deficit' [in previous periods], international gas prices surged tenfold ... in just over 12 months," the fund manager said in a Feb. 28 analysis of fourth-quarter 2022 earnings results and 2023 guidance. "A high probability exists that a move of similar magnitude could happen in the North American gas market in the next 12 months." |
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