- Natural gas drilling remains under pressure
- Dry gas producers slowing operations
- Broad NGL “frac spread” well above average.
Dear Reader,
Completion activity took another leg down today by ten, driven by the Permian, Appalachia, and Eagle Ford.
We see another move lower, albeit a smaller one, as we head into Memorial Day weekend.
Even with the shift in Permian activity, we are still at record levels and will remain at the high end of historical completions in the region.
The bigger issue will remain natural gas activity, which won’t see much of a bounce in the near term.
Natural Gas Drilling Remains Under Pressure
Natural gas drilling is going to remain under pressure as oversupplies remain in specific locations.
While everyone will quote Henry Hub, it doesn’t mean that companies get that pricing.
Instead, they are beholden to their region’s price points that will keep realizations limited.
The prices going into Waha are the most important right now, because that is the pricing metric for many of the Permian producers.
“Waha Pool” has gone negative several times so far the last few weeks, and there is a strong likelihood we will see more negative pricing.
Once you factor in shipping costs, the negative netbacks to the E&P only keep moving lower.
For most, natural gas is not the target for the Permian, so as long as WTI sits at $72 (and realistically above $65), many of the E&Ps won’t blink.
Natural gas specific E&Ps were MUCH faster to adjust production vs previous years (let’s call it a decade of hard lessons), which we expected to be the case.
Many of the E&Ps have highlighted their focus on cash flows and balance sheet strength, which meant as HH prices hit $2, activity would drop.
We were also heading into shoulder season, so now as activity slows and we head into summer – pricing should strengthen.
We don’t expect near-term prices to get to a level to bring back dry gas activity, so it will help support prices above $2.50.
Dry Gas Producers Slowing Operations
The pressure in the natural gas market has already pushed dry gas producers to slow operations, and the reduction in activity has spread to some of the wet gas producers as well.
We expect to see natural gas liquids (NGLs) pricing remain range bound even as local demand stays very weak.
The below chart helps highlight how NGLs are still elevated versus other years with large storage builds.
The difference this time around is the new export infrastructure and elevated global demand.
This will help slow the downside slide of pricing and put a bit of a floor in pricing.
Broad NGL “Frac Spread” Well Above Average
Even with the underlying pressure of supply, we still have the broad NGL “frac spread” sitting well above average when we look back to 2016.
The support will be driven by robust exports as global demand grows, and our prices support buying against international competitors.
As KSA reduces production, it limits the amount of LPG they can produce keeping the global market firm and supporting more U.S. exports.
Thanks for reading,
Freedom Financial News
