Natural Gas Companies Cutting Back on Capital Spending
Major oil and gas companies were already cutting capital spending as a reaction to record low prices before the coronavirus pandemic arrived. Now companies are facing two major hurdles.
In Southwestern Pennsylvania, Range Resources and EQT are two of the largest gas drilling companies. EQT, which has been undergoing restructuring since Toby Rice took over as its chief executive officer and installed his own management team last year, announced March 16 that it was slashing its capital spending for 2020 by another $75 million.
“To further enhance efficient capital deployment, EQT has reduced development activity in its Ohio Utica operations, lowering its expected 2020 capital expenditures by approximately $75 million to $1.075 – $1.175 billion. Through schedule and well design optimization, this shift in activity is not expected to impact EQT's 2020 production guidance of 1,450 – 1,500 Bcfe (billion cubic feet.) EQT has now reduced its 2020 capital expenditure guidance by approximately $200 million since it was originally published in October 2019. Adjusted free cash flow for 2020 is now expected to be $225 - $325 million,” a press release stated. The company also announced that it was suspending its quarterly dividend to investors in order to put the money toward debt reduction.
Range Resources announced March 31 that it was reducing its 2020 capital budget by $90 million, from $520 million to $430 million. It expects to maintain its production of 2.3 Bcfe a day. The company has dropped its capital spending by 40 percent over 2019.
Leaders of both Range and EQT said that the companies are positioned to navigate the volatile oil and gas market. The price of natural gas is now under $1.60 per million Btu at the Henry Hub, far under record highs and down from the $3 range just three years ago due to oversupply. The COVID-19 outbreak is disrupting energy markets, causing further problems.
Other gas companies have taken similar steps, including Antero, the biggest operator in West Virginia. A press release said its capital budget of $1.15 billion in 2020 will represent a 10 percent decrease from the prior year. However, Paul Rady, its chairman and CEO, pointed to well cost-saving initiatives implemented in 2019 as a benefit of preventing further reduction.
In addition, the oil price war between Russia and Saudi Arabia, which has flooded the market and further depressed the price of that commodity, and the pandemic that has greatly reduced demand, has put the oil industry into freefall. There is some debate about whether a pullback in oil drilling could help Marcellus producers. EQT CEO Rice said company leaders “believe the recent OPEC actions impacting the global oil markets will drive fundamental improvements to the U.S. natural gas sector.”
Major oil companies are also being hit hard. Shell, which is building a petrochemical cracker plant in Beaver County, announced that it plans to cut $4 billion in operating costs and $5 billion in spending this year. Construction activity at the plant has been temporarily suspended due to the COVID-19 virus, idling more than 8,000 workers.
Even with gas production expected to be maintained at or near current levels, local governments could still see a smaller amount of Act 13 money in the coming year, because it is based on a formula that also takes in price. In addition, suppliers to the oil and gas industry could see their businesses slow in line with companies’ reduced capital spending and layoffs could take a toll on related businesses as drilling slows.