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A recent study by an independent think tank spells out a growing crisis for shale gas producers in the Appalachian Basin.
The Institute for Energy Economics and Financial Analysis (IEEFA), a philanthropically-funded organization that conducts global research and analyses on financial and economic issues related to energy and the environment in order to accelerate the transition to a sustainable energy economy, conducted the study. It determined that eight of Appalachia’s largest gas producers spent $73.4 billion more on drilling and other capital expenses than they realized by selling gas over the past decade. In the face of continued low gas prices, the companies recorded negative cash flows of $427 million in the fourth quarter of 2019 alone, the study found.
Why is that important? Free cash flow is the amount of cash a company generates from its operations minus the cost of capital spending and is considered an important financial measurement, according to Investopedia. 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.
The study looked at financial data from Antero, Chesapeake. CNX, Cabot, EQT, Gulfport, Range Resources, and Southwestern. It found that in 2019, despite significant reductions in capital spending, negative cash flow was $466 million and that just two of the companies – Cabot and EQT – had positive cash flows. EQT has cut capital spending estimates by about $200 million and is working to pay down debt. Likewise, CNX recently announced it was cutting $45 million more from its 2020 capital budget in order to reduce debt.
The study also found that the companies had nearly $30 billion in long-term debt, yet their current market capitalization has shrunk to $10.5 billion.
Pennsylvania is the second-leading gas producer in the U.S., behind only Texas, and production in the Marcellus and Utica plays in 2019 grew 10 percent and reached an all-time high. “Yet, paradoxically, as gas production boomed, financial distress mounted for the Appalachian frackers,” the study states.
Much of the problem can be traced to low prices, which fell to well under $2 per MMBtu before rebounding a bit in recent weeks. Companies are the victim of their own success, because of an oversupply of natural gas. A big contributor to the glut has been activity in the Permian Basin in Texas, where gas is a byproduct of overproduction in oil drilling.
“Permian gas has become so uneconomic that oil producers simply burn their natural gas rather than selling it, with Permian flaring reaching an all-time high in the third quarter of 2019,” the study states.
The study notes that oil and gas stock prices have fallen substantially as companies have struggled. “Appalachian frackers, pummeled by low natural gas prices, heavy debt loads and investor demands to improve cash flows, reduced their (capital expenditure) dramatically in 2019. Those reductions have continued in early 2020.
Even though cash flow losses have slowed substantially from earlier in the decade, bankruptcy risks are rising and it appears that the financial distress could accelerate given the COVID-19 pandemic that is causing demand to fall.