Prices for natural gas futures are expected to decline on average in 2023, but natural gas producers' cash flows could remain relatively high for at least another year, according to Wall Street analysts.

The futures curve predicts prices in the $4/MMBtu to $6/MMBtu range. That would generate plenty of free cash that shale gas exploration and production companies, or E&Ps, could use to pay down debt or increase payments to investors.

"Amidst a higher production growth environment, we see this as somewhat of a 'best of both worlds' scenario for U.S. E&Ps and midstream names," Raymond James & Associates oil and gas analysts J.R. Weston and John Freeman told clients Dec. 19. "In other words, don't be overly concerned by the directional change in the price deck — good things are on the horizon for the U.S. natural gas complex relative to historical pricing."

Access to LNG export terminals on Gulf Coast makes a difference

In 2022, shale gas producers chose various combinations of returning money to investors and paying back the bank. These types of discussions are expected to continue on earnings calls in the new year. The group, on average, is expected to spend 16% more in 2023 while increasing cash flow per share by 17%, according to analysts surveyed by S&P Global Market Intelligence.

Investors are choosing drillers with strong balance sheets, the ability to pay cash to shareholders and access to the Gulf Coast's liquefied natural gas export terminals, according to Goldman Sachs oil and gas analysts Neil Mehta and Umang Choudhary. Among these companies, Goldman considers Antero Resources Corp. and Chesapeake Energy Corp. underpriced. Raymond James analysts also see Antero as a "strong buy."

Antero Senior Vice President of Finance and CFO Michael Kennedy would not commit the company to paying dividends in 2023, in contrast to its peers. "We are now targeting greater than 50% of free cash flow to be used through the share repurchase program," Kennedy told analysts on Antero's third-quarter earnings call. "This substantial free cash flow will enable us to continue returning capital to our shareholders while also continuing to pay down debt."

Antero repurchased $730 million of shares through the third quarter and has doubled its share buyback program to $2 billion. Perhaps more importantly, it has 2 Bcf/d of capacity on pipelines connecting Antero's West Virginia and Ohio Marcellus Shale wells to the Gulf Coast.

Chesapeake's advantage is the lack of debt on its balance sheet.

After emerging from bankruptcy in 2021, Chesapeake expanded operations in the Haynesville Shale on the Texas-Louisiana border, near LNG terminals, and beefed up its gathering assets in the play. The company has said its goal is to have 15%-20% of its production volumes sold into the LNG market, ideally at international prices.

The Oklahoma driller is using its extra cash flow to buy back shares while paying shareholders a base dividend of 55 cents per quarter with a variable $3.16/share dividend in the most recent quarter.

"We see an attractive long-term demand outlook from incremental LNG exports starting in 2025, which we believe will likely need higher gas prices to incentivize production growth, particularly since a key gas basin (Appalachia) has limited takeaway capacity," Mehta and Choudhary told clients Dec. 16.

Capital spending

Big gas operators remain reluctant to spend more capital to drill wells and capture higher commodity prices. Threading the needle between low capital spending and higher average prices will continue to challenge producers, Truist Securities Inc. oil and gas analyst Neal Dingmann said Dec. 19.

"While there are a host of 2023 themes, we believe the primary challenge will be to maintain stable production with the least incremental capital spend," Dingmann told clients.

However, Dingmann said it appears that some drillers are going a bit beyond their maintenance plans while natural gas prices are still historically high.

"While most E&Ps since 3Q22 earnings have suggested to us that they have had little to no change to their maintenance capital programs, we think some frack data suggests otherwise," Dingmann said.

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