(Bloomberg) — Skyrocketing energy prices turned US natural gas drillers into cash machines that showered shareholders in returns over the past two years. But the heyday appears to be over.
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A US supply glut that no one saw coming triggered a collapse in the prices of the power-plant and furnace fuel, prompting analysts to slash free-cash-flow estimates for the sector. For a group of six gas-focused shale drillers that includes EQT Corp., that means roughly $8 billion that was expected to be available for dividends and share buybacks is now off the table. In just four months, the collective 2023 cash-flow outlook for the group shriveled by 75%.
The reversal of fortunes underscores the dramatic drop in domestic gas that as recently as August was at a 14-year high, commanding more than $10 per million British thermal units. This month, the fuel has languished around the $2.25 mark, a price so low that explorers are canceling drilling projects and recalling rigs from the field.
The glut developed after a key US gas-export facility was shut by a fire and abnormally mild winter weather gutted heating demand. Investors will get their first glimpse of how deep the price slump has cut when US drillers begin announcing first-quarter results this week.
Gas futures for delivery through the end of this year are averaging around $2.80 on the New York Mercantile Exchange, below the $3-plus that most producers need to generate “reasonable” free cash flow, according to Rob Thummel, who helps manage about $8 billion in energy-related assets at Tortoise.
“That will limit the amount of income to buy back stock and pay the dividends that some of these companies have stated,” Thummel said during an interview. Some companies may opt to curb capital spending to protect investor payouts, he added.
Depressed gas prices are pushing drillers to curtail production growth in the interests of cash preservation. Comstock Resources Inc. and Southwestern Energy Co. already have signaled a slowdown in work in Louisiana’s Haynesville Shale region.
“What’s going to suffer the most is the number of drilling rigs,” said Angie Gildea, who leads KPMG LLP’s US energy, natural resources and chemicals team. Management teams “will take lower production growth over having to reduce dividends to shareholders.”
The situation is so dire that Citigroup Inc. analysts see some companies actually shutting down existing wells — something that usually only happens during natural disasters.
“We expect further reductions across both natural gas rigs and frac fleets in the Haynesville, while throttling and shut-ins are likely to be needed across all basins by the summer,” Citigroup analysts led by Paul Diamond wrote in a note to clients.
To be sure, most US gas producers are expected to generate free cash flow this year. What’s more, a rebound is seen for 2024 as export demand strengthens, buoying prices.
“I don’t think we can keep below $3 natural gas for very long,” Thummel said. “And that just means a lot of free cash flow for these companies going forward.”
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