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Side Effect of Rising Oil Drilling

June 16, 2018

 

 

Higher oil prices are hurting companies that frack for natural gas while American shale drillers benefit at the same time. As companies unearth gas as a byproduct, they respond to rising oil prices by drilling more of it. This has weighted on already low gas prices thus adding more pressure to shale frackers in regions that primarily product gas. The average share price for the five top companies focused on the oil-rich Permian Basin in Texas and New Mexico are up more than 16% over the past year. Share prices for the top five producers focused on the Marcellus Shale in Appalachia, the country’s largest deposit of natural gas, are down more than 9%.

 

Similar to shale drillers, those focused on natural gas in the Marcellus – a group that includes Cabot Oil & Gas Corporation, EQT Corporation and Southwestern Energy Company have been under investor pressure to live within their means. According to S&P Global, “Those companies have spent about $106 million more than they made in the first quarter of 2018. That has been down from outspending cash flow by more than $274 million in the previous quarter and more than $735 million in the first quarter of 2017.

 

Investors are reluctant to put more money into gas drillers because gas has been cheap for years and doesn’t look primed to go up soon. Demand for natural gas is predicted to rise globally over the next decade as many countries switch from coal-fired power plants to gas-powered ones. It is predicted that U.S. gas production will outpace domestic consumption through 2009. In terms of numbers, natural-gas futures for July delivery closed at $2.939 million British thermal units on Tuesday and has been below $4 since 2014. Investors should consider the potential of average prices staying below $3 for years, meanwhile U.S. oil prices climb to more than $65 per barrel for the first time since 2014. For most companies, the ongoing strategy has been to cut costs and squeeze out efficiencies over the past years while weathering the storm.

 

Prices for gas-focused shale companies have rebounded a bit since earlier this year with investors having potentially seen a bottom for gas producers. These companies are no longer buying and growing for the sake of it. It is left to the investors discretion if the market has gotten too bearish on natural gas or not.

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