U.S. natural gas prices may be bottoming out, with more positive signs to the end of the year, according to several energy analyst teams previewing quarterly profits.
The top oilfield services (OFS) companies are set to roll out their second quarter 2023 results beginning this week, along with some midstream operators. In the next few weeks, a blizzard of reports by exploration and production (E&P) companies is set to follow.
Forecasts by several energy analyst firms point to capital expenditures (capex) holding steady to the end of the year, with potential upside for merger and acquisition (M&A) activity.
Look for Henry Hub gas prices to gain ground.
“Natural gas prices are expected to improve into the year‐end, and we see the potential for an aggressive buying opportunity around the shoulder season, depending on winter weather forecasts,” according to analysts with Siebert Williams Shank.
“Natural gas prices have rebounded recently on the back of warm global temperatures increasing power demand expectations,” the Siebert analysts said. “However, with elevated inventory levels (24.1% above a year‐ago level and 14.2% above the five‐year average) and strong domestic production…prices could remain under pressure if above-normal power demand does not materialize this summer.
“We remain positive 2025-plus on the expected increase in LNG export demand but lowered our 2025 estimate to be more in line with strip pricing.”
The gassy E&Ps are currently discounting sub-$3.00, but “we continue to see a huge opportunity longer term, as we expect $4.00‐5.00/Mcf in 2025-plus, which would drive significant upside above and beyond” for E&Ps.
NGI’s Spot Gas National Avg. on Monday gained 14.0 cents to $2.620. This compared with a July bidweek National Avg. of $2.560. The August New York Mercantile Exchange Henry Hub gas futures contract, meanwhile, settled Monday at $2.512, and September ended at $2.504.
Jefferies Equity Research also has bumped up its 2023 Henry Hub price forecast by 1%, with prices expected to average $2.87. The 2024 gas price forecast was cut by 0.5% to $3.52, with the long-term forecast for 2025 and beyond “unchanged” at $4.00.
“The story from the first quarter was ‘at least they aren’t going up anymore,’ and now E&P management teams are increasingly confident that service costs will be lower next year,” Jefferies analysts said of North American (NAM) operators.
Among other things, the average E&P may realize a 4% decline “in per-foot costs year/year as contract rolls in the second half of 2023 (2H23) begin to trickle in, with consumables the primary driver followed by slight declines in rig rates.”
Gas Price Bottom?
Morningstar analysts in their preview of 2Q2023 earnings noted that U.S. natural gas had “dipped below our midcycle forecast ($3.30) but that hasn't spooked the market like it otherwise might have, as there is a clear line of sight to incremental export capacity that will drive up demand in 2024.”
During 2Q2023, Henry Hub prices fell sequentially by 21%, with Japan-Korea-Marker down 34% and Dutch Title Transfer Facility pricing off by 31%, Morningstar noted. “Market optimism regarding the European Union (EU) gas consumption picture remains high, especially with a slower-than-expected recovery in gas consumption and liquefied natural gas demand from China,” the Morningstar analysts said.
“The restart of the U.S. LNG export terminal Freeport will help somewhat, but we'll need unusually warm or cold weather in the EU this year and the addition of new U.S. LNG capacity in 2024 to really tighten the market and provide a level of price support.”
BMO Capital Markets analysts led by Phillip Jungwirth think domestic gas prices are bottoming.
“We think the worst is behind us for U.S. gas prices,” BMO’s team said. “Warmer-than-normal winter weather, coupled with the delayed restart of Freeport and excess supply, translated to above-normal storage levels; that has now changed as the drop in the gas rig count is expected to moderate the growth in supply.”
Meanwhile, the Canadian natural gas market “looks abysmal,” Jungwirth’s team said. “The Western Canadian natural gas market has returned to its ‘natural state’ of excess supply. We expect continued growth in production over the next 18 months could lead to excessively high storage levels that require some production to be shut-in.”
Rising NAM Capex?
A mid-year global survey of upstream spending unveiled earlier this month by Evercore ISI found respondents looking to boost North American spend by 21% this year. The forecast budgets in part are based on Henry Hub natural gas prices averaging $2.97 to the end of this year.
The global spending survey, issued earlier this month, is forecasting worldwide upstream spending for 2023 to increase by 11%, implying a 293-basis point contraction from a survey in December, which forecast the 14% growth, according to the Evercore team led by James West.
The decline from six months ago is “primarily due to the recent volatility in commodity prices, driven by a combination of supply and demand market factors,” the analyst team said. The factors include “the uncertainty in China’s economic growth, a possible U.S. recession, credit market tightening, higher-than-expected oil flows from Russia, increasing global oil supply and higher inventory releases in the U.S.”
NAM E&Ps are more optimistic overall about capex plans to the end of this year.
“More than 40% of survey respondents indicated plans to increase spending in 2024,” the Evercore survey indicated. Another 40% “plan to maintain current spending levels and 14% plan to reduce capex.”
Notably, NAM spending growth of 21% is “primarily driven” by private E&Ps, independents and the majors.” International growth, set to climb by 11% in 2023 (excluding Russia), is led in order by the Middle East, Europe, Latin America and Africa.
E&P upstream spending fundamentals “remain strong, especially internationally and offshore,” the survey respondents said. “The global energy system is being reorganized, with hydrocarbons continuing to play a vital role in the energy mix.
“Fueled by years of underinvestment, and energy security and reliability concerns, E&P upstream spending growth is being driven by high hydrocarbon prices, attempts to arrest production declines, a global shift toward natural gas and plans to increase spare productive capacity.”
Siebert’s analyst team does not expect many companies to reduce capex materially, even on deflationary pressures and improved efficiencies.
“Execution remains crucial in drawing investors back to the sector, and we believe management teams want to ensure execution,” the analysts noted. “Thus, the deflationary tailwinds in 2H23 provide upside, if they materialize.”
The priority remains “debt reduction and building cash with any excess free cash flow,” the analysts said. “However, we believe we are approaching an inflection off the pricing lows in 2Q2023, with an improved pricing outlook in 2H23 and 2024, barring a severe global recession and lack of normal winter weather.”
OFS Momentum
Meanwhile, OFS costs are moderating slightly, the respondents to Evercore’s survey said.
“Over the past year, most respondents witnessed a material increase in service costs, with the greatest pricing surge experienced in drilling consumables, such as fluids and pipes,” the Evercore analysts noted. “However, cost pressures are slipping” for pressure pumping equipment, consumables, and completion and downhole tools.
Evercore analysts expect to see “continued momentum” for OFS earnings in the second quarter with the leaders, Baker Hughes Co., Halliburton Co. and SLB Ltd., meeting expectations.
All three are scheduled to report their quarterly results this week.
“The companies are likely to highlight continued strength in international and offshore activity, offsetting the expected slowing in 4Q2023 NAM activity,” the analyst team said. “NAM pricing remains intact for now, with international pricing progressing per expectations, and we expect companies to reiterate '23 guidance.”
Keep an eye on the U.S. natural gas rig counts and Lower 48 drilling activity overall, several analysts advised.
Following a brief uptick two weeks ago, the unconventional natural gas rig count declined to 119 last Friday, down by three week/week. One gas rig was lost in each of three basins: the Eagle Ford and Haynesville shales, and the Permian Basin.
“With activity curtailments in natural gas rig counts progressing as expected, we expect markets to focus on companies' outlook on macro and planned activity for the remainder of ’23/’24,” the Evercore analysts said. “Within Haynesville, we expect color on expectations of further decline (if any) in the basin’s rig count for 2H23.”
“The second quarter saw a pickup in deal activity as oil prices stabilized,” according to Evercore. For example, in the E&P space alone, Civitas Resources Inc. spent $4.7 billion to gain entry into the Permian. Northern Oil & Gas Inc. snagged two partnerships to build its Lower 48 war chest. Crescent Energy Co. added an Eagle Ford bolt-on. Chevron Corp. bought Denver-based PDC Energy Inc. And as 3Q2023 began, ExxonMobil agreed to spend nearly $5 billion to buy carbon capture specialist Denbury Inc.
“With many larger privates off the table, everyone wants to know what is out there?,” Evercore analysts asked. The “answer is likely public M&A.” Chevron and ExxonMobil “have shown a willingness to consolidate when strategically viable, but what has likely kept a lid on activity is the small premiums.”
