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Despite the turbulence of 2020, shale gas producers were able to achieve positive free cash flows but only by significantly cutting capital expenditures on drilling.
A recent report from the Institute for Energy Economics and Financial Analysis (IEEFA) found that a cross-section of 30 gas producers generated $1.8 billion in free cash flow, but at the same time cut capital spending $20 billion from the previous year. A number of producers operating in the Appalachian Marcellus and Utica region, including CNX, EQT, and Range Resources, were included in the analysis.
Free cash flow is an important metric for investors. It is defined as the amount of cash generated by a company’s core business, minus its capital spending. Having a positive free cash flow allows companies to pay dividends to stockholders and to reduce debt. Negative free cash flow, on the other hand, can force a company to take on more debt, sell assets, or dip into reserves.
Since 2010, the companies in IEEFA’s cross-section had reported negative free cash flow totaling $758 billion, and 2020 was the first year of positive free cash flow since the fracking boom began.
“Last year’s positive free cash flows were only possible because shale companies cut their capital spending to the lowest level in more than a decade” said Clark Williams-Derry, IEEFA energy finance analyst and report co-author, in a press release. “Restraining capital spending could help the fracking sector generate cash, but low levels of investment also undermine the industry’s prospects for growth.”
The gas industry faced an economic downturn before the COVID-19 pandemic began, as it struggled with oversupply and low prices. COVID-19 exacerbated that with falling sales volumes, weak revenues and numerous bankruptcies. In order to maintain operations, producers slashed capital spending by 41 percent from $48.9 billion in 2019 to $28.8 billion in 2020.
Gas prices have increased modestly in recent months, but producers have committed to keeping production at maintenance levels for the foreseeable future, drilling only enough wells to replace those that are at the end of their life span. In addition, the report notes that the industry faces “global headwinds,” as renewable energy sources become cheaper and more readily available and government’s increasing focus on curbing global warming.
“Oil and gas producers face a dilemma,” said Ashish Solanki, and IEEFA fellow and report co-author. “Keeping capital spending in check could improve the industry’s cash performance. Yet falling investment will constrain production.”