Consolidation will continue to make sense for producers in the Appalachian Basin as those companies that made it through the recent downturn focus on efficiency, according to a recent report from Pittsburgh-based law firm Babst Calland.
In its annual report on the state of the Marcellus and Utica shale producing region, Babst Calland highlighted the impact low commodity prices have had on the industry over the past year.
Recently the Appalachian Basin has seen consolidation through merger and acquisition (M&A) activity, the firm said, pointing to recent activity by Rice Energy Inc. and EQT Corp., among others.
"With efficiency of operations in mind, natural gas producers continue to focus on consolidating their activities geographically," the firm said. "The oil and gas industry faced significant financial stress over the past year, and 2016 will go down as one of the more dramatic years in the United States' oil and gas history."
Babst Calland said 2016 saw 70 North American exploration and production (E&P) companies file for bankruptcy.
Last week, EQT announced an estimated $8 billion takeover of Appalachian neighbor Rice Energy, a deal that would create the largest U.S. natural gas producer. Management for EQT said the synergies from the transaction would be focused in Southwest Pennsylvania, where the combination of the acreage positions would allow increased lateral lengths and reduced operational costs.
While companies with "sufficient financial strength and operational ability" may be able to take advantage of opportunities for "large-scale consolidation," others in the basin may seek joint ventures to keep costs low, according to Babst Calland.
"Where acreage positions are complementary, natural gas producers may also seek to joint venture on a unit-by-unit basis with other producers who are able to operate at a lower cost, with higher productivity, or with a more intense focus in a particular area," the firm said.
Changing Political Landscape
The report also explored a range of recent legal and regulatory trends impacting producers in the Appalachian Basin.
The past year has seen major changes in the regulatory outlook for the industry with the election of President Trump, according to Joseph Reinhart, co-chair of Babst Calland's Energy and Natural Resources Group.
"A fundamental shift" in energy policies established by the Trump administration figures to "lead to more pipeline development, reduced federal oversight...and increased access to oil and natural gas serves.
"However, many nongovernmental organizations have vowed to challenge the Trump administration's initiatives, while many states and local governments have signaled their intention to take greater roles in regulating the oil and gas industry," Reinhart said. "2017 promises to be an exciting year as these competing political forces play out."
The report noted that opposition groups have been attempting to use the courts to fight the industry, and some local governments have sought "to test their regulatory authority by enacting strict regulations" impeding oil and gas development.
Despite these challenges, the “strength of the shale industry” continues to provide Pennsylvania, Ohio and West Virginia "with significant economic opportunities," Reinhart said. He pointed to potential downstream development resulting from growth in the Marcellus and Utica, including Shell Chemical Appalachia LLC's proposed ethane cracker facility in Beaver County, PA, "as just one example of the expanding market for natural gas."