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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Shale Gas Revolution Is Not Done Yet

Most of the time companies see greater productivity as a good thing. Improved asset productivity helps companies produce more output for every dollar of input which usually increases profits. But what if every company across an industry produced more output? That is exactly what is happening in the natural gas market right now, and the results are looking increasingly dire for natural gas companies.

This summer, EQT Corp drilled what might be the largest natural gas well ever in the U.S. The summertime gusher in Pennsylvania’s Green County put out enough gas in the first 24 hour to power every house in Pittsburgh for 3 days. EQT is not alone in producing such prolific wells. Several other wells near EQT’s Scotts Run 591340 well have produced similar results. EQT is so confident in the productive output of the Utica field near the Scotts Run well that it is suspending work elsewhere to focus on that area. The result is that natural gas prices will likely come under further pressure. Related: Oil Sands Producers Can Live With Alberta’s New Carbon Taxes

The issue is that the Utica formation looks like it may be so prolific that it will put out far more natural gas than many market participants had previously expected. The market is just coming to that realization now and natural gas prices have fallen by nearly a quarter since mid-summer as a result. Related: Saudi Cash Crisis Intensifies As Interbank Rates Soar

Utica’s breakeven price per thousand cubic feet of gas is already lower than just about any other major formation in the US at $2.77. Nearby Marcellus has a breakeven cost of around $2.78 per thousand cubic feet. Every other major formation in the U.S. has a breakeven price per thousand cubic feet of more than $3.00. Increased activity in Utica has the potential to lower breakeven points even further. Pennsylvania fields in general appear to be emerging as extremely stiff competition for other natural gas fields across the U.S., and look poised to make money even at current low gas rates. Related: An Unnoticed Casualty of The Commodities Price Drop

The increased productivity of the Utica field could hardly come at a worse time from a price perspective. The U.S. continuous 48 states recently surpassed 4 trillion cubic feet of stored gas for the first time ever, with all regions of the country showing positive increases in stored gas amounts. This is close to the total storage capacity of natural gas in the U.S.

At this point the natural gas markets look like they will continue to be weak for years to come. Liquefied natural gas (LNG) terminals are being developed slowly as the U.S. government and environmentalists continue to have concerns about the environmental effects of exporting LNG. Further, while many coal plants have been converted to natural gas over time, that trend seems to be slowing as the most inefficient existing plants have already been shuttered. Add to this the low price of coal currently, and the economics of further plant conversions do not make as much sense as they once did.

In light of these trends natural gas investors need to prepare for years of continued low prices and companies should be axing any projects that require product costs above the mid-to-high $2 range to earn an acceptable economic return. It’s unclear how much lower gas prices could go, but if Utica proves to be anywhere near as productive as current drilling results indicate, it is likely that current natural gas prices are not at a bottom.

By Michael McDonald of Oilprice.com

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  • Ron Wagner on December 01 2015 said:
    The logical thing to do is to use all of this cleaner, cheaper, more abundant fuel to run every large engine possible around the world. Air pollution is a major problem in China, India, America, Europe, etc. Coal should be replaced for that reason alone. Diesel is next, then gasoline in large vehicles.

    Leadership is the key, and making it clearly understood that electric vehicles are not
    able to do the job. Hybrids could possibly but should use clean natural gas.

    See Useful References for The Natural Gas Revolution: https://docs.google.com/document/d/19Yf0MWpo91vrlu-mmJtjB1ERukjJo5W41oi4RZVQBug/edit

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