OREANDA-NEWS. Weak realized natural gas prices related to the ongoing supply glut from the prolific Marcellus shale play may inhibit further production growth there, according to Fitch Ratings.

Several key Marcellus producers appear to be lowering 2016 production growth expectations relative to historical rates, driven by the impact of sustained low prices on economics. The unhedged production-weighted gas price for a sample of six Marcellus players in Q3 was $2.07/mcf, or $0.67 below Henry Hub, for the nine months ending Sept. 30. Recent quotes at the Leidy hub of $1.10/mcf are $1.00 below Henry Hub, suggesting continued pricing weakness for Marcellus producers without adequate transportation capacity to higher priced markets.

Marcellus producers continue to pursue lower costs and improved efficiencies to remain competitive. However, in our sample of Marcellus producers, production-weighted revenue or $2.07 per mcfe remains below full-cycle costs, estimated at $2.50/mcfe. The narrowing gap between revenue and half-cycle costs may be the catalyst for slowing growth as producer revenues edge closer to cash breakeven costs.

In early 2015, producers appeared willing to temporarily run below full-cycle breakeven in exchange for growth in production and proved (1P) reserves. However, at current economics, continued growth could heighten financial risk and limit future value creation, and supports producers move to slow production growth in 2016.

Larger Marcellus producers (EQT, SWN, COG, RRC, AR) are not likely to see significant near-term credit impacts, as low operating costs, moderated growth expectations, adequate liquidity, large proved reserve positions, and the ability to scale capex to cash flows should largely insulate existing credit profiles from low prices.

EQT reported strong liquidity in the form of $1.7 billion in cash and a $1.5 billion undrawn facility at Sept. 30. 2016. Hedge positions will also provide some uplift for Marcellus producers that rolled in hedges at higher price levels, including AR, EQT, and RRC, who have hedged 95-100%, 40-45%, and 50-55%, respectively, of 2016E natural gas production. In particular, AR had a very strong hedge asset of $2.8 billion as of Sept. 30.

In the medium term, the combination of falling rig counts, improving takeaway capacity, and diminishing efficiency gains should provide pricing support for Marcellus producers. This will likely support credit profiles by improving reserve development prospects, encouraging volume growth, and ultimately, increasing cash flow.