'Smart' Appalachian Operators Can Handle Sub $2 Natural Gas

The Appalachian Basin is one U.S. hydrocarbon prospection patch that just keeps on giving natural gas – be it via conventional or unconventional means. It’s what the U.S. Energy Information Administration (EIA) describes as the ‘Appalachia Effect.’

For the number crunchers in the market that effect has translated into an uptick in production from 7.8 Bcf/day in 2012 to 23.8 Bcf/day in 2017. That’s a higher natural gas yield than any other OPEC producer, and the primary reason the U.S. has been propelled up the market leaders’ board, with the Appalachian Basin accounting for nearly 50 percent of headline American production. 

And there’s more on the way, for the EIA’s latest outlook projects the region’s production to rise to 50 Bcf/day by 2050, with a veritable who’s who of the industry wanting in on the act. Conventional production aside, rising shale gas output from the basin’s Marcellus and Utica shales combined is already lending credence to the projection.

Everyone from Range Resources to Chesapeake, EQT Production to CNX Gas Co., is vying for hydrocarbon molecules in the basin that stretches from Ohio to Pennsylvania. 

But while reference cases and projections are one thing, operating reality is quite another. Anecdotal and empirical evidence suggests many players are worried about possible sub-$2 MMBtu Henry Hub prices, thus cutting production and divesting assets; a pricing prospect the region faced back in 2012 for broadly similar reasons – oversupply and difficulty in moving the product to market courtesy of pipeline access and capacity issues.

What’s more, natural gas power burn demand across the U.S. Northeast is expected to dip by around 10 percent over the coming months, going by S&P Global Platts’ projections. This could add further seasonal pressure to already existing headwinds.

According to Moody’s, many regional players will cut growth investment and manage their businesses within operating cash flow. This has only become visible in recent months after slower activity in the fourth quarter of 2018 meant the likes of CNX built a backlog of inventory that kept investment up in the first quarter of 2019.

Despite ~$2.5 MMBtu Henry Hub prices, not every regional player is spooked. The current market permutations demand “smart operations,” says Rusty Hutson, Chief Executive Officer of Diversified Gas & Oil (DGO), a London-listed owner, operator and acquirer of conventional mature wells spread across the Appalachian basin.

Speaking to Rigzone, Hutson explained his modus operandi: “We leverage economies of scale to reduce costs. We go for assets many of the major regional players have given up with zero to declining production and turn them around.”

Often overlapping assets shortens well tenders routes and decreases equipment overhead giving players such as DGO the kind of purchasing power that ultimately reduces costs.

Hutson says he’s “completely sold” on the potential of the Appalachian basin and has made acquisitions all around the region from those very players curtailing investment, including multimillion dollar buys via divestment drives initiated by CNX and Anadarko Petroleum.