Viewpoint: Gas price rebound could lift US output

OREANDA-NEWS. August 22, 2016. A summer rebound in natural gas prices has encouraged producers to resume drilling, potentially driving gas output higher before the end of the year.

Large producers have ramped up drilling after prompt-month gas prices surged to a 13-month settlement high near \\$3/mmBtu in early July on hot weather and sluggish injections into gas storage, a sign of rising demand. The 2017-calendar strip breached the \\$3/mmBtu mark amid speculation that the overall decline in drilling will cut deeper into US output. Prices have since retreated from those summer highs but are still trading near \\$2.65/mmBtu, well above winter 2015-16 levels.

Some companies are already capitalizing on those higher prices. Big US independents such as Devon Energy, Southwestern Energy and Chesapeake Energy have increased production guidance on better-than-expected well results. Some are even returning rigs to large gas producing areas like the Marcellus shale in Pennsylvania and West Virginia and the Permian basin of west Texas and southeastern New Mexico.

Higher prices as well as falling service costs and well performance improvements could stem recent output declines and limit the prospects of significantly higher prices next year, especially if the US has another mild winter.

"I do think that gas production will be higher this winter," said Pearce Hammond, an analyst with Simmons & Company told Argus. But he noted that the market is unlikely to see significant production increases until 2017.

Gross gas production, which includes gas that does not reach market, fell in May to 80.6 Bcf/d (2.3bn m?/d), down by 0.7pc from April and 0.4pc lower than a year earlier, according to the most recent US Energy Information Administration data. The agency has said that the summer rally in gas prices could reverse those declines during the second half of 2016.

Southwestern Energy has doubled its planned 2016 spending to \\$725mn-\\$775mn and raised its full year production guidance to about 2.4 Bcf/d of natural gas equivalent (cfe/d), up by 5pc from its previous outlook. Gas production for 2016 should be flat with prior-year levels and may begin increasing next year, the company said

The independent plans to add one to two rigs a month until its rig count reaches five by the end of the third quarter. The company will stay focused on the Marcellus shale, adding two rigs each in the northeast and southwest portions of that field. It plans to add one rig to Arkansas' Fayetteville shale.

Southwestern has already hedged about 228 Bcf of its expected 2017 gas production at a floor price of \\$3.01/1,000 cf. Those volumes represent 26pc of its estimated 2016 production.

Other Marcellus producers like EQT and Range Resources have cited a surge in Nymex prompt-month prices as motivation to drill more shale wells in 2016.

In addition to an increase in futures prices, the discounts for Marcellus production at Transcontinental Gas pipeline's Leidy Line to the Henry Hub have thinned on summer heat and increased pipeline infrastructure, providing some benefit to northeast producers.

The Leidy discount since 1 June has narrowed by 23pc to \\$1.22/mmBtu, while prices there have increased by about a fifth to \\$1.48/mmBtu.

Chesapeake, the second-largest producer of US gas by volume, increased its 2016 production guidance by about 3pc on better-than-expected results from wells in Louisiana's Haynesville shale. The company did dial back that projection after it agreed last week to convey interests in north Texas' Barnett shale to private-equity backed Saddle Barnett Resources. But Chesapeake's production may still increase from 2015 levels after adjusting for asset sales, according to its revised outlook.

Devon Energy plans to boost its rig count to nine from two during the second half of this year. The company is ramping up development of the Permian and Oklahoma's Stack formation to capture rising energy prices following the completion of a \\$3.2bn divestiture program.

"The recovery in gas [prices] has helped out significantly," David Hager, Devon's chief executive, said during a conference call with investors earlier this month. "If we see gas prices sustain near the levels where they are now, we may be able to add a little bit more activity in 2017."

Devon's oil wells can produce large amounts of associated gas. Higher prices for gas could ease concerns about the pace of an oil price recovery.