US shale gas drillers focus on volume cuts in Q2 earnings calls due to low prices

Most US shale drillers' second-quarter results included reports that they curtailed production efforts at least slightly to save money in the face of $2/MMBtu natural gas prices. While financial analysts applauded the move, investors kept their distance.

The majority of these shale gas exploration and production companies (E&Ps) delayed more drilling and trimmed their production volumes slightly. A few — Chesapeake Energy, EQT and Coterra Energy — made substantial cuts, only to be rewarded with a lower share price.

"Gas conference calls focused more on the macro environment and thoughts on [the] potential to defer completions or curtail production into the upcoming shoulder," Tudor Pickering Holt analyst Matt Portillo told clients in an Aug. 12 report. "We continue to believe gas will find a floor near term and remain constructive in 2025."

Watching the NYMEX

The earliest production cuts, about 1 Bcfe per day for the first half of the year, started in the first quarter with Appalachian operator EQT, the nation's largest gas producer. EQT executives indicated on their July 24 earnings call that until prices rise, the gas will stay in the ground.

"As planned, we curtailed 1 Bcf/day of gross production throughout most of the quarter, which, along with non-operated curtailments, impacted net production by approximately 60 Bcfe" during the second quarter, EQT CFO Jeremy Knop told analysts. "Our second-half 2024 production guidance assumes 90 Bcfe of anticipated curtailments."

"We do, on a very dynamic basis, optimize realized pricing to make sure that we're optimizing value creation and not just giving our product away for a price where we can't make money," Knop said.

Despite healthy cuts in output, EQT will still produce about 7% more gas this year, according to its guidance.

Building a big bench

Chesapeake Energy, on the verge of closing its $7.4 billion deal for peer Southwestern Energy, chopped nearly a quarter off its 2024 gas production guidance.

Chesapeake has been drilling and completing wells, then holding them off the market. Chesapeake's 2024 guidance calls for a 22% cut in gas volumes, with the company building a backlog of drilled but uncompleted wells (DUCs) and completed wells that are not being turned-in-line (TIL). Chesapeake said it can put this held gas to sale quickly and add up to 1 Bcf/d more to its volumes if commodity gas prices move higher.

"Through the first half of the year, we have deferred 46 TILs and built 29 DUCs," Chesapeake President and CEO Domenic Dell'Osso told analysts on a July 30 earnings call. "In addition to the deferral of TILs and completions, we proactively curtailed volumes during the weaker spring shoulder pricing months and are prepared to do so again as necessary in the fall."

CNX volumes increase

In a twist, smaller Appalachian operator CNX Resources confirmed a 16% increase in sales volumes this year, relying on an aggressive hedging program to deliver profitable prices.

"We're not curtailing any additional production," CNX CFO Alan Shepard told analysts on a July 25 earnings call. "We're running just above our hedge book with the margin of safety that we need around that production profile to make sure we don't dip below the hedge book."

CNX stock has gained 30% year to date, the best performance among a group of 10 US E&Ps.

According to Tudor Pickering Holt, prices will need to get to $3.25-$3.50/MMBtu to bring back gas production, although some restraint will still be required. When benchmark prices got above $3/MMBtu in June, drillers piled in and drilled away the surplus, the firm's analysts said.

"A confluence of moving pieces through June and July have pushed physical market pricing lower to force the industry to alter near-term production plans," they said.