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Marcellus Operators Continue Facing Squeeze of Low NatGas Prices

A sample of six Marcellus Shale operators taken by Fitch Ratings shows, not surprisingly, that weak realized natural gas prices related to an ongoing supply glut in the Northeast could further inhibit production growth in the play next year.

Fitch noted that several key Marcellus players appear to be lowering their 2016 growth expectations compared to historical rates. Last month, Cabot Oil & Gas Corp. said its preliminary 2016 budget would likely be $615 million, down from the $850 million it has forecasted to spend this year (see Shale DailyOct. 23). EQT Corp. also said on its third quarter earnings call last month that next year's budget would likely be lower than this year's projected $1.9 billion in capital expenditures (see Shale DailyOct. 22).

The unhedged production-weighted natural gas price for a sample of six unspecified Marcellus operators was $2.07/Mcf, or 67 cents below Henry Hub for the nine months ending Sept. 30, according to Fitch. The firm said recent quotes at the Leidy Hub of $1.10/Mcf are $1 below Henry Hub, "suggesting continued pricing weakness for Marcellus producers without adequate transportation capacity to higher priced markets."

Earlier this year, producers appeared willing to temporarily run below their breakeven in exchange for growth in production and proved reserves. Fitch said, however, that at current economics continued growth could "heighten financial risk and limit future value creation, and supports producers move to slow production growth in 2016."

Fitch added that larger Marcellus producers such as EQT, Southwestern Energy Co., Cabot, Range Resources Corp. and Antero Resources Corp. aren't likely to see significant near-term credit impacts because low operating costs; moderated growth expectations; adequate liquidity; large proved reserve positions, and the ability to scale capital expenditures to cash flows should largely insulate existing credit profiles from low prices.

The firm also said that in the medium-term the combination of falling rig counts, improving takeaway and efficiency gains should provide pricing support for Marcellus producers.

"This will likely support credit profiles by improving reserve development prospects, encouraging volume growth, and ultimately, increasing cash flow," Fitch said.

Since the commodities downturn in June 2014, while production in nearly every major shale basin in the country has declined, Northeast supply has increased by about 3 Bcf/d. Financial analysts still expect Northeast production -- driven largely by the Marcellus -- to increase by about half that much next year (see Shale DailySept. 16).

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