With coronavirus fears roiling energy markets and the oil and gas industry entering 4Q2019 earnings season chanting the mantra of capital discipline, analysts at Tudor, Pickering, Holt & Co. (TPH) said Wednesday they’re lowering their 2020 price decks.
TPH revised its 2020 natural gas price projection 19 cents lower to $2.06/Mcf.
The bearishness in the natural gas market, exacerbated by mild winter weather, already drove gassy producer Cabot Oil & Gas Corp. to cut back to maintenance level capital spending for 2020, a move that was “not entirely unexpected,” according to TPH.
Meanwhile, crude futures have sold off sharply on demand shocks threatened by the coronavirus outbreak in China, and TPH now expects West Texas Intermediate (WTI) prices to average about $53/bbl in 2020, with Brent at around $57/bbl.
“Long-term prices now sit with WTI at $51/bbl (Brent at around $55/bbl) and gas losing 8 cents to $2.34/Mcf,” the TPH analysts said.
In terms of the coronavirus impact on oil markets, analysts at Moody’s Investors Service said in a report Wednesday that, near-term price volatility aside, they would expect prices to rebound once the outbreak has been contained.
“However, it is difficult to ascertain how pervasive, widespread and severe the contagion will be before it is contained,” they said. “…An extended disruption of economic activity in China would also reverberate around the world given the size and interconnectedness of the Chinese economy.
“…We would expect the rise in oil inventories to be potentially offset, at least to some degree, by cuts in supply,” the Moody’s team added. “Still, a period of several months of slowing activity is likely to dampen oil prices for its duration, and perhaps beyond, depending on the buildup in global inventories. Weak commodity prices will reduce the profitability and credit metrics of exploration and production companies.”
Reduced activity among exploration and production (E&P) companies is already playing out, especially among gas-focused producers, based on capital expenditure (capex) disclosures thus far.
“It’s still early days for U.S. upstream earnings,” but earnings announcements from producers as of Wednesday pointed to a “positive trend in upstream capex plans as faster cycle times, lower costs and lower commodity prices are pushing down budgets in 2020,” TPH analysts said. “After updating our models to strip and accounting for lower capital costs, we now see our U.S. upstream capex budgets trending down about 15% in 2020.
“Gas basins are harder hit, down about 21%, and we would expect more cuts to potentially come in the second half of 2020 as the industry loses hedge coverage heading into 2021.”
Meanwhile, the headwinds in oil markets have had analysts at Genscape Inc. slashing their gas production outlook on the prospect of less crude-focused activity leading to less associated gas hitting the market.
“Oil prices continue to get battered by the coronavirus’ destruction of Chinese and global oil demand,” Genscape senior natural gas analyst Rick Margolin said in a note to clients Wednesday. The recent slide in oil prices “has taken more than 1 Bcf/d out of our gas production forecast for 2020, and well over 2 Bcf/d out of our 2021 gas production forecast.”
Looking nearer term, Lower 48 production is already down compared to volumes recorded earlier in the winter. Genscape’s models showed Lower 48 output down to 91 Bcf/d for Wednesday, which would represent a four-and-a-half-month low.
“Our estimate of East region production is down to 31.85 Bcf/d,” Margolin said. “If the number holds, it will be the lowest daily volume for the region since mid-August. East volumes have been capped by widespread maintenance and the lagging price environment. So far this February, East production is averaging just a tick over 32 Bcf/d. At the moment, this lags January’s output by more than 0.44 Bcf/d.”
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