After years of tough times, the natural gas industry is booming. The future looks bright – unless the Biden administration targets clean-burning gas in its climate agenda.
In Appalachia, the largest U.S. gas basin, natural gas prices are more than double last year’s average, which has turned producer focus on funding operations by generating free-cash flow into a gold mine.
As a result of those swelling coffers, nearly all of the large independents in the Marcellus and Utica shale plays are reducing debt and getting in a position to return capital to investors within 18 months.
This remarkable turnaround from the dire market conditions of just two years ago has been driven by investor demands for capital discipline that emerged from the severe 2018 and 2019 downturn. These same Appalachian pure plays – dominated by some of the largest U.S. gas producers – were hanging by a thread as capital markets all but slammed shut.
Sticking to capital and production discipline – even with the U.S. gas forward curve in a $3 to $4 per million Btu range through winter 2022-23 — and deploying free cash flow to the balance sheet has become harder as U.S. demand continues to rise along with tempting potential profits. However, the strategy has paid off handsomely.
At current strip pricing, Scotiabank
notes that all the major Appalachian independents are poised to meet investor expectations to bring debt-to-cash flow ratios to a 1-1.5x range by year-end 2022. Leveraged debt fell 0.15x in the second quarter, pulling the average debt burden of the group to 2.6x, just above the sub-2x targets that most management teams have said must be met before initiating substantial cash returns.
Favorable hedging positions for 2022 — already at a stout 60 percent-plus of output — and robust forward pricing builds confidence that free cash flow will remain abundant.
Scotiabank estimates that E&Ps reaped $210 million in free-cash flow in the first half of this year, up from $61 million in 2020. And based on reported hedging strategies, E&Ps could garner $525 million in free cash flow for full-year 2021 and $808 million in 2022.
EQT, the largest U.S. gas producer, is estimated to generate $716 million in free cash flow in 2021 and $1.4 billion in 2020. This dramatic change in financial health is righting the E&Ps’ once-floundering ships. With debt under control, some firms like EQT could soon attain investor-grade credit ratings.
Once gas-focused producers are back in good financial shape, investors may shift their attention toward growth. Encouraged by a rising gas strip and growing U.S. and international gas demand, some investors are more bullish on gas than oil amid the accelerating energy transition.
Still, “disciplined” growth…
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