Amid considerable weakness in natural gas pricing, Cabot Oil & Gas Corp. will cut back to its previously disclosed maintenance capital program in 2020, a $575 million budget expected to deliver around 2.4 Bcf/d of net production this year.
Management for the Houston-based producer issued updated 2020 guidance Tuesday ahead of a 4Q2019 and year-end earnings conference call scheduled for Feb. 21.
The maintenance plan and projected 2.4 Bcf/d of output “assumes a moderate amount of curtailments throughout the year based on an expectation of normal pipeline maintenance, higher line pressures and weaker spot market prices,” management said.
The projected 2020 output is roughly flat with 4Q2019 production totals. Cabot expects to report production of around 2,457 MMcfe/d for the fourth quarter, exceeding the high end of its guidance. The producer, which operates in Northeast Pennsylvania, had signaled last year that it was evaluating plans to prepare for a tough commodity price environment in 2020.
The 2020 program would deliver $275-300 million in free cash flow and generate a “return on capital employed” of around 11-12%, assuming average New York Mercantile Exchange (Nymex) pricing of $2.25/MMBtu.
As of midday Tuesday, December 2020 was the only Nymex futures contract this year trading above $2.25. BofA Research recently projected average pricing of $1.99 for 2020.
“Our decision to reduce capital spending by approximately 27% year/year highlights our continued commitment to disciplined capital allocation,” CEO Dan Dinges said. “We believe that by substantially reducing our drilling and completion activity in 2020, we are taking the necessary steps to adapt to the current uncertainty in the natural gas markets, and we are prepared to maintain these reduced activity levels as long as this lower price environment persists.”
Dinges said Cabot still expects to generate positive free cash flow and cover its dividend commitments but acknowledged that the operator is “by no means immune to the significant decline in natural gas prices” since last year.
Weighed down by a glut of Lower 48 production, natural gas prices have only grown weaker through the 2019/20 winter, with futures sinking to four-year lows as exceptionally mild weather has exacerbated the supply glut.
Said Dinges, “We are encouraged by the reduction in horizontal rig counts across the Marcellus, Utica and Haynesville — which are collectively down 39% since their recent peaks in 2Q2019 — and are hopeful that market forces will continue to move natural gas supply and demand toward a more sustainable balance; however, we will continue to evaluate the potential for additional capital reductions if prices erode further.”
On the production front, there have been signs of hope for bulls. Analyst estimates indicate a pullback in Lower 48 production totals since November.
What’s more, the recent collapse in oil prices — fueled by fears of the coronavirus and potential demand impacts — could materially impact future natural gas production trends. Genscape Inc. analysts said Tuesday they’re modeling “substantial reductions” in their gas production forecast based on the recent hit to oil prices.
“In early January, the West Texas Intermediate (WTI) benchmark price had topped $65/bbl,” Genscape senior natural gas analyst Rick Margolin said. “Since then the price has plummeted, with trading yesterday slipping below the $50/bbl mark for the first time in 13 months. This leads to a significant reduction in our production outlooks for oil and gas by causing rig counts to decline much faster than efficiency gains can compensate for.”
The oil price decline also means major impacts to forecast natural gas output because of the amount of Lower 48 associated gas produced from oil-directed drilling activity, according to Margolin.
As of Monday Genscape’s “expectations for 2020 gas production growth have been curtailed by nearly 1.4 Bcf/d versus our previous main forecast update from six weeks ago,” the analyst said. “2021 production expectations were reduced by more than 2.3 Bcf/d versus the previous forecast. As a result, 2021 production is now expected to post a year/year decline.”
Cabot realized prices of $2.15/Mcf during the period, or $2.05 excluding derivatives. Cabot expects capital expenditures of $160-170 for 4Q2019, management said.
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