Promised Land for Gas Drillers Becomes Glutted No Man's Land

(Bloomberg) -- Natural gas producers who last week were basking in the strongest price environment in almost a quarter century are getting crushed.

A January rally in U.S. gas futures that was on course to be the best for that time of year since 1994 fizzled in the final two days of the month as mild winter forecasts cast gloom on the demand outlook. But investors had already began dumping natural gas stocks, spooked by the specter of a glut later this year.

More than $7 billion in market value has been wiped out so far this year for the eight biggest U.S. gas producers that don’t also pump significant amounts of crude. Among the hardest hit have been Southwestern Energy Co., Gulfport Energy Corp. and Range Resources Corp., which have fallen 30 percent, 28 percent and 21 percent, respectively, since the end of 2017.

In a matter of months, swelling output from Pennsylvania gas wells is expected to smash head-on into a growing quantity of the fuel from West Texas fields where it’s a byproduct of oil production. Shipments of the fuel to Mexico and other foreign markets isn’t growing fast enough to absorb burgeoning output from shale fields with names like the Marcellus and the Permian.

Ground zero for the clash of competing supplies will be the U.S. Gulf Coast, home to the first gas-export facility in the continental U.S. as well as onshore pipelines that haul gas across the Rio Grande to Mexican buyers. Drillers who ramped up production in anticipation of a demand-driven price spike along the Gulf may be facing a starkly different reality.

Evolving markets

“Those premium markets stop becoming premium markets as more gas starts flowing there,” Scott Hanold, energy analyst at RBC Capital Markets LLC in Minneapolis, said by phone. “That’s just the natural evolution of how things go.”

A representative from Range declined to comment and a spokesperson from Gulfport was not immediately available. Southwestern CEO Bill Way said in an emailed statement that "robust hedging" and "rigorous financial discipline" will help the company endure a lower commodity price environment.

For years, drillers in the U.S. Northeast were unable to fully access population centers and points of export because of insufficient pipeline capacity. Now, pipeline operators are furiously building new lines to connect the Marcellus shale in Appalachia to richer markets.

But timing couldn’t be worse: As soon as much of that Pennsylvania gas reaches Louisiana and Texas, it’ll be competing for market share with loads of the fuel pumped from West Texas.

Construction season

More than 9 billion cubic feet a day of pipelines will be added in the Northeast this year, David Deckelbaum, analyst at KeyBanc Capital Markets Inc. in New York, said by telephone. That’s an add-on of nearly 35 percent from the end of last year, according to Bloomberg New Energy Finance data.

In response to the buildout, drillers in the region upped production to 26 billion cubic feet a day in November, a 15 percent increase from the previous year, according to the Energy Information Administration.

At the same time, the amount of gas produced in Texas jumped almost 7 percent in a year to 23 billion cubic feet a day. This is all on the heels of rising oil prices, making producers pump as many molecules as they can out of the ground to maximize profits.

Mexico Delays

After Mexico opened its energy sector in 2014, a wave of pipelines and gas-fired power plants were announced, opening a new vein of demand for U.S. producers. But the region has been plagued by delays.

There’s also a lag in new LNG export capacity. Dominion Energy Inc.’s Cove Point complex will be just the second gas-export facility in the continental U.S. when it kicks off in March. After that, no new terminals are set for completion until at least the end of the year.

“If you go back a few years, there was a hope that LNG exports and Mexico exports would be a boom for the industry and help spur some demand to keep the supply-demand balance tighter,” Hanold said. It hasn’t happened yet, he said.

To contact the reporter on this story: Ryan Collins in Houston at rcollins74@bloomberg.net.

To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net, Joe Carroll, Tina Davis

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