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Pure-play shale gas drillers shed debt, reward investors in Q3 as prices soar from SNL Energy Finance Daily Pure-play shale gas drillers shed debt, reward investors in Q3 as prices soarByline: Bill Holland Investors continued to like pure-play shale gas stocks after a third-quarter earnings season that was light on surprises and heavy on multiples of free cash flow, which companies used for debt reduction and to return capital to shareholders. U.S. exploration and production companies, or E&Ps, told analysts they are not inclined to spend more money drilling new wells despite rising natural gas prices. They are convinced the market no longer pays for production growth. "Despite oil prices up over 60% YTD (and gas up ~120%!), 2021 estimated oil and gas capital budgets have risen just ~1% globally, an unprecedented figure," Raymond James & Associates oil and gas analyst John Freeman told clients Nov. 9. "Big picture, E&Ps are not only 'talking the talk' regarding capital discipline, but again in 2021, are definitively 'walking the walk.'" What to do with all that cash was the topic of earnings conference calls, with six of the top-producing shale gas E&Ps opting to pay down debt and four returning cash to shareholders. The stock market did not seem to care. Among the top 10 producers, the best performer over the past three months was Comstock Resources Inc., which said it will continue to pay down debt. The worst performer, Southwestern Energy Co., still gained more than the S&P 500 index and said it used the free cash to pay off debt and help finance the $1.85 billion purchase of Blackstone Inc.-backed producer GEP Haynesville LLC. Comstock said it will grow production in the Haynesville Shale to meet increased natural gas demand from its neighbors, Gulf Coast LNG export terminals. "Now, all of a sudden, you can see the demand for the gas in U.S. and others worldwide," Comstock Chairman and CEO Jay Allison said on his company's Nov. 3 third-quarter earnings call. "This global demand for gas ... they need it in Europe; they need it in Asia; they need it here." "We expect Comstock to continue to benefit from high near-term gas prices, amplified by its acceleration, with proceeds likely solely focused on debt reduction, although we will be looking for a discussion on shareholder return timelines," Truist oil and gas analyst Neal Dingmann said prior to the call. Allison hinted on the call that Comstock might restore its dividend but did not set a date. Comstock is insulated from general investor pressure because Dallas Cowboys football team owner Jerry Jones owns nearly 60% of its shares. The availability of free cash is sparking mergers and acquisitions, Raymond James said, but the deal room seems to be open only to big players and only if the deal immediately adds to production and cash flow. "The large-scale M&A market has really heated up since the back half of the third quarter," Raymond James said. The headline deals ConocoPhillips buying Royal Dutch Shell PLC's Permian assets for $9.5 billion, Continental Resources Inc. buying Pioneer Natural Resources Co.'s Permian Delaware assets for $3.25 billion and Southwestern entering the Haynesville mark a shift away from small-scale acreage purchases to big deals where only a few are eligible to participate, Raymond James said. "There are becoming fewer and fewer players in the large-scale M&A game, and it wouldn't surprise us if deals like these kept popping over the next few quarters," Raymond James said. "Based on market reaction to recent large-scale M&A, investors are on board with these deals if, and only if, they are viewed as bolt-on or synergistic to existing positions." |
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