Amid ongoing market uncertainty, most of Appalachia's top shale gas producers are taking a more cautious stance, cutting down on NGL production in favor of capital discipline, cash flow generation and debt reduction.
Following a downturn in the second quarter, oil and NGL prices rallied at the start of the third quarter and remained steady throughout. The Brent crude oil futures prompt month contract ranged between $39 per barrel and nearly $46/b during the third quarter, compared to the year-ago range of $56/b to $69/b. Mont Belvieu NGL prices spanned 46 cents per gallon to 50 cents per gallon, compared to the prior-year range of 38 cents per gallon to nearly 50 cents per gallon.
Ten of the largest shale producers covered by S&P Global Market Intelligence saw mixed results in terms of NGL prices during the quarter, with half of the companies posting year-over-year increases of 5% to 18% and others noting year-over-year decreases of 2% to 17%.
Despite seeing a 2% yearly decline in NGL prices for the quarter, Appalachia's largest NGL producer, Antero Resources Corp., maintained its optimistic outlook for NGL prices but noted that NGL production may take a few years to recover.
"In the aftermath of the March OPEC+ price war and COVID-19 pandemic, the resulting decline in rig and completion crew activity in oil-focused shale basins has set up expectations of a prolonged period of depressed U.S. oil production," said Antero Vice President of Liquids Marketing and Transportation David Cannelongo during the company's Oct. 29 third-quarter earnings call. "Thus far, that is what has materialized, a decline in flattening of oil production, which has resulted in a decrease in associated NGL production from the oil-focused plays."
"We believe it may take three to four years for U.S. NGL production to return to pre-COVID-19 levels," Cannelongo said.
Still, the company believes that global market dynamics would shore up NGL prices in the near term. Meanwhile, Antero executives emphasized the focus on generating free cash flow and evaluating asset monetization opportunities to cut debt.
Appalachia's second-largest NGL producer, Range Resources Corp., took a similar approach despite seeing a 4% increase in NGL revenue for the quarter on the back of an 8% increase in NGL prices year over year.
"[For 2021 and beyond,] Range remains committed to sustainable free cash flow, generating corporate-level returns," Range President, CEO and director Jeffrey Ventura said during the company's Oct. 30 earnings call. "While 2021 and even 2022 prices have improved considerably for natural gas and NGLs, we believe the forward curve remains below a sustainable long-term price."
Ventura described the market as one that does not incentivize growth. "Instead, Range will seek to maintain production around current levels and optimize cash flow similar to our capital program this year and use excess cash flow to reduce debt and ultimately return this free cash flow to shareholders," Ventura said.
Range Senior Vice President and COO Dennis Degner said that while U.S. NGL supply reportedly rose 7% versus the year-ago period, the growth came from increased ethane recovery needed to satisfy "robust chemical demand."
"The remainder of the NGL barrel actually saw a decrease in year-on-year supply as associated NGL production [remains] challenged and industry spending is better aligned with cash flow," Degner said.
Southwestern Energy Co., another top NGL producer in Appalachia, saw the second-largest yearly increase in third-quarter NGL revenues at 31%.
"NGL prices this quarter improved 62% compared to the second quarter of this year," Southwestern Energy Executive Vice President and CFO Julian Mark Bott said during the company's Oct. 30 earnings call. "We expect continued strengthening of NGL prices as we move through the rest of the year with fourth-quarter expected realizations in the 28% to 34% of [West Texas Intermediate], consistent with assumptions in our full-year guidance."
However, company executives promised maintenance-level output and balance-sheet discipline through the fourth quarter and into 2021. "And to be clear, should seasonal prices improve further, we will not increase our activity above maintenance level," Southwestern President, CEO and director William Way said.
"[W]e don't have any intent to invest dollars that would take us beyond maintenance capital, and any excess cash flow that comes from seasonal price changes, at least at this point, would go to pay down debt. And that's the right thing to do, and so that's what we would do," Way said.