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E&P NatGas Market Insight Expected in 2Qs

North American exploration and production (E&P) companies will begin to unveil their second quarter results over the coming weeks, and while there aren't expected to be any big surprises, analysts are hoping for details on natural gas market fundamentals -- particularly in the Marcellus Shale -- along with insight into emerging plays and more information on ethane rejection in natural gas liquids (NGL) plays.

Analysts with Tudor, Pickering, Holt & Co. (TPH), as well as Wells Fargo Securities, recently offered their take on what they expect, and what they hope, to hear this earnings season. E&P earnings on tap this week include Freeport McMoRan Copper & Gold, which recently added Plains Exploration & Production Co. and McMoRan Exploration.

Also disclosing quarterly reports this week are Encana Corp., Penn Virginia Resources Partners, Newfield Exploration Co., Cabot Oil & Gas Corp., Noble Energy Inc., EQT Corp. and Range Resources Corp.

The spot natural gas price rally early this year "ran ahead of fundamentals" as the weekly supply data shifted from a balanced market in the first three months to a significant oversupply in 2Q2013, noted TPH.

"With gas prices now back to $3.50/Mcf, we foresee market dynamics moving back toward a balanced weekly supply (1 Bcf/d-plus)," which should put inventory at 3.8 Tcf by the end of summer injection," TPH said. "Supply decline may be marginal through the remainder of the year, as we now expect an additional 1 Bcf/d of production to come onstream through compression, pipeline expansion and processing facility build-out in the Marcellus and Utica.

"The silver lining: low gas prices will likely slow rig acceleration in 2014 as operators in general want gas between $4.00 and $4.50/Mcf to pick up additional rigs." TPH is estimating that 25-50 more rigs would balance the market in 2014.

Regional pricing pressure is beginning to impact the Marcellus as production increases, said both analysts. It might be a third quarter issue for financials "but we are starting to see some meaningful discounts to Henry Hub on several pipeline delivery points in the region," said Wells Fargo.

The problem "appears to be most acute in the southern Marcellus, and certain zones along the Leidy, Dominion South, and Tennessee Gas 300 have seen discounts of 50 cents-$1.20/Mcf in late June and early July." Recently, the differentials have narrowed and most operators appear confident that it's a short-term problem.

"Operators continue to report strong and improving well results, but macro headwinds weigh on producers," said Wells Fargo. "We saw gas come close to hitting $4.50 on the quarter before dropping back to a range of $3.50 to $4.00 and continue to believe gas will be range-bound between $3.50 and $4.50 for some time, with weather being the key determinant on where gas trades within the range."

Wells Fargo recently nudged higher its forecast for U.S. natural gas (see related story).

One glimmer of hope for Northeast ethane takeaway is the Mariner West pipeline, soon to begin operations, "but with ethane at rock bottom prices, trading roughly on par per MMBtu with natural gas, we only expect enough ethane removed from the gas stream to meet pipeline specs," said Wells Fargo. Ethane recovery may not be economical until 2015-2016, when more projects are completed, a forecast that matches comments two months ago by Williams CEO Alan Armstrong (see NGI, May 13).

TPH analysts will be watching some of the same things. "NGLs have been weak and may hit new lows in 3Q2013."

More insight from E&Ps is expected on several big onshore plays, including the Utica Shale, where details on whether it's a true wet gas play or better weighted to dry gas is being watched. In addition, the Williston Basin (think Bakken Shale) is on the radar. Last month, two EOG Resources Inc. wells in the basin were said to produce "with nearly two times the normal sand volume. Turns out, that was only half of it," Wells Fargo said.

EOG hasn't publicly disclosed the results, but the word from nonoperating partners is that wells in the Parshall field "were spaced 160-acres apart, with 15,000-foot laterals completed with 60 stages, nine million pounds of sand and a cemented liner." Early results "show a 170-day average rate that was 70% greater than an legacy offset wells, while another had a 300-day average rate that increased by 30%."

Also providing more details will be oilfield service companies (see related story). The sector didn't have a lot of the usual catalysts in 2Q2013 to indicate a recovery in North America's onshore, but most of the sector should provide "solid" results, according to TPH.

From the outside looking in, the flat U.S. horizontal rig count and the onshore drilling backlog, among other things, may weigh on results, but the offshore reports should be clearer. On tap this week are reports from Halliburton Co. (Monday), Nabors Drilling Inc. (Wednesday), and Cameron International, Diamond Offshore, Patterson UTI and Precision Drilling on Thursday.

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