Cabot Oil & Gas Corp. and Southwestern Energy Co. were the latest Appalachian operators to report weak price realizations in the second quarter when pipeline constraints widened basis differentials in the Northeast.
U.S. benchmark prices climbed during the period and have continued to move higher since, creating an even bigger gap with local prices in Appalachia, where pipeline maintenance and outages have suppressed returns. Cabot increased its differential guidance for the year but sees an improving outlook.
“We are optimistic about a strong improvement in local pricing in the second half of the year, driven by our expectations for continued strength in regional gas demand, flat production profiles across the Appalachian Basin, and a significant reduction in storage levels, which are currently 17% below 2020 levels and 8% below the five-year average,” said Cabot CEO Dan Dinges.
Southwestern reported a steep loss on unsettled derivatives. Other Appalachian operators, such as EQT Corp. and Range Resources Corp. have also been dented this earnings season by questions over their hedging strategies. EQT reported a loss on its hedge position, while both Range and EQT have locked in prices below current market levels to protect against volatility in the Northeast.
Roughly 2 Bcf/d of excess transportation capacity currently exists in the Appalachian Basin, according to East Daley Capital Inc. That leaves little wiggle room when pipelines are squeezed by unplanned events.
Appalachian takeaway did get a lift Thursday when Texas Eastern Transmission Co. said it received approval to restart operations on a portion of its 30-inch system, which has been offline since May.
Southwestern CEO Bill Way said the company’s acquisition of Haynesville Shale pure-play Indigo Natural Resources LLC is on track to close by year’s end, with a shareholder vote scheduled for Aug. 27. The deal would give the company access to the Gulf Coast and get it closer to booming liquefied natural gas export demand. It would also limit its price exposure in the Northeast.
“Notably, the firm sales agreements and fixed basis differentials will expand the company’s margins and dampen its overall basis volatility,” Way said of the acquisition on Friday during a call to discuss second-quarter results.
Dinges said much the same about Cabot’s pending merger with Cimarex Energy Co., noting that it would expand the company’s commodity exposure beyond the northern tier of the Marcellus Shale to provide greater scale and better balance its operations. Cimarex operates in the Permian and Anadarko basins. The merger is expected to close in 4Q2021.
Cabot produced 2.205 Bcfe/d during the second quarter, down from 2.229 Bcfe/d in the year-ago period. Dinges said maintenance downtime at a third-party compressor station and operational delays led to the decline. Cabot plans to ramp production through the remainder of the year as prices are expected to continue improving and the Leidy South expansion project enters full service.
Cabot, which currently produces 100% natural gas in just one Pennsylvania county, said natural gas price realizations, including hedges, were $2.05/Mcf, up 35% from the year-ago period.
Southwestern produced 276 Bcfe during the second quarter, up from 201 Bcfe in the year-ago period before it had acquired Montage Resources Corp. and gained access to Ohio.
Southwestern placed its first three Utica Shale wells online in the state during the second quarter. They had an average 30-day rate of 25 MMcf/d.
Including hedges, Southwestern reported an average realized commodity price of $2.20/Mcfe, up from $1.65 in the year-ago period. The company also stressed that it has 90% of its remaining 2021 production volumes protected against widening basis differentials in the Northeast through transportation capacity and basis hedges.
Southwestern reported a second-quarter net loss of $609 million (minus 90 cents/share), compared to a net loss of $880 million (minus $1.63) in the year-ago period. The 2Q2021 loss included a $772 million loss on unsettled derivatives.
Cabot reported second-quarter net income of $30.5 million (8 cents/share), compared to net income of $30.4 million (8 cents) in 2Q2020.