Natural gas CEO questions why any driller would be growing ‘in this market’

Cabot CEO

Pittsburgh Business Times – Cabot Oil and Gas Corp. CEO Dan O. Dinges on Friday questioned why other drillers are continuing to grow production in a sustained period of low gas prices.

“If you had a vision that the current strip (price) is going to be what is going to be perpetually into the future … I don’t know why anybody would be drilling wells as a growth measure into this market,” Dinges said during Cabot’s conference call with analysts discussing the natural gas company’s results.

Dinges had strong words for the suggestion that any drillers should be working to increase production when prices continue to slip. Natural gas prices in the Henry Hub spot market averaged $2.02 per million British thermal units in January, and haven’t seen much of an improvement since. Gas production increased in 2019 as it has in every year since the boom. It’s likely to decrease slightly in 2020 and beyond as the number of rigs in the Marcellus and Utica shale continue to fall. But Dinges, like others in the industry, thinks there should be no growth.

Annual US Nat Gas production

“At a $2 NYMEX (natural gas price), we still generate free cash flow, we’ll generate an earnings profile,” Dinges said. “And so even us, there’s nobody else that can make that statement, we are at a maintenance-level capital (spend) because we don’t think it’s prudent to drill up your core inventory and push it out as a losing proposition.”

He acknowledged that some of Cabot’s rivals have to drill, either for debt or balance sheet reasons, or contracts for firm transportation of natural gas and minimum volume commitments.

“Rationalization is going to have to prevail into this market,” Dinges said. “It’s not sustainable and the balance sheets are not sustainable out there.”

Cabot (NYSE: COG) hasn’t been immune to the down natural gas market. Like a lot of natural gas producers, Cabot’s stock is down sharply from its 52-week high of $27.64 a share. It was trading at $15.07 a share Friday morning. It reported $1.98 billion in natural-gas revenue in 2019, up from $1.88 billion in 2018, but its revenue fell sharply in the fourth quarter. It has also retained more share value than other producers in the natural gas basin.

Cabot has three rigs running in northeastern Pennsylvania, but it plans to cut one in March after its drilling program is completed. Overall natural gas production in 2020 is likely to be down about 3 percent compared to last year, and will be down in the first and second quarters before perhaps increasing in the second half of 2020.

However, as Dinges said, Cabot has cut its capital budget — which is used to drill more wells — from $783 million in 2019 to $575 million in 2020 with the potential for further cuts if the prices for natural gas don’t recover. Dinges said it’s going through its contracts with service companies “to provide the flexibility we would need to amend our plan if the macro environment dictates. We would absolutely do that if need be.”

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