(Bloomberg) -- US shale-gas drillers are betting that a price slump eroding their cash-flow outlook will be short-lived and that a rebound awaits in 2024.
A group of suppliers including EQT Corp. and Southwestern Energy Co. used the latest round of earnings calls with analysts to reassure investors that natural gas supply and demand fundamentals remain structurally bullish even after prices have slumped by more than half this year.
The dramatic rise of natural gas to 14-year highs in 2022 bolstered producers with unprecedented cash while driving a surge in utility bills. This year’s drop after a mild winter has traders and producers speculating whether the market’s exuberance has come to an end or just taken a pause. A return to higher prices would be unwelcome for consumers who are still faced with debilitating inflation for food and other energy-related costs.
Suppliers’ message is that production growth in the US is quickly slowing down as shale explorers everywhere from Appalachia to Haynesville cut down on drilling activity. That should indicate that a supply glut currently weighing on prices will shrink into next year, when new export capacity is set to considerably boost demand for the heating and power-generation fuel from Europe and elsewhere.
“Near-term activity reduction will result in lower natural gas production this year, further strengthening the longer-term fundamental outlook,” Southwestern Energy Chief Executive Officer Bill Way said during the company’s first-quarter earnings call.
Antero Resources Corp. Chief Financial Officer Michael Kennedy echoed those comments, saying reduced drilling will lead to “significant volatility in pricing as natural gas demand grows materially in 2024.” Comstock Resources Inc. CEO Jay Allison said the gas outlook is “extremely positive” while anticipating “a little bit more pain.”
Chesapeake Energy Corp., Comstock. and APA Corp. are among the companies that signaled a slowdown in drilling activities.
The bullish view on 2024 is reflected in producers’ hedge books. Antero said last week it paid about $200 million to unwind contracts aimed at protecting it against lower gas prices next year as the company seeks to be fully exposed to the commodity upside. EQT, the largest producer, said it has locked in prices for only 10% of its year-ahead production. That’s down from roughly 45% a year ago.
US benchmark futures have traded in a contango structure, meaning gas for delivery further in the future is more expensive than today. On Thursday, contracts for 2024 commanded an average premium of 34% over 2023 maturities.
“I think we’re seeing a very positive setup here,” David Khani, CFO of EQT, said during the company’s first-quarter call. Stronger power demand this summer could work as catalyst for higher gas prices, he added. “The big negative could be if summer doesn’t show up.”
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