Natural gas and oil executives are likely to “prudently navigate” through turbulent commodity prices this year before sailing into smoother seas heading into 2025, according to industry analysts.
Exploration and production (E&P) companies in their quarterly conference calls, which are already underway, should be “guiding conservatively” in 2024, “particularly on the natural gas side,” Tudor, Pickering, Holt & Co. (TPH) analyst Matt Portillo said.
“In our view, 1Q2024/2024 outlooks will trump the 4Q2023 results,” Portillo said, “especially with the uncertainty around commodity prices and more stable service costs.” TPH is forecasting oilfield services costs to climb by 5% from 2023.
Capital efficiency remains a top goal. However, “there is downward pressure on spending in 2024, as managements prudently navigate around the weaker commodity price backdrop, especially on the natural gas side, which should ultimately set up for a more constructive macro in 2025-plus.”
After skyrocketing to record highs around $10/MMBtu in the summer of 2022, Henry Hub natural gas prices have languished below $3.00 throughout most of the past year, according to NGI’s price index data. Earlier this month, Winter Storm Heather briefly sent prices above $13, but prices quickly plummeted and were below $2.500 on Monday.
Natural gas forward prices do not paint a much rosier picture, according to NGI. Henry Hub is seen remaining under $3.00 throughout most of 2024, until the normal winter premium provides some uplift. It isn’t until 2025 until the U.S. benchmark is seen rising sustainably above that level.
Some of the Lower 48 E&Ps, particularly those that are natural gas-weighted, may be “forced to cut activity, likely creating setbacks and inefficiencies in 2025 programs,” Portillo noted. In the second half of the year, though, more investors should take up the banner on gassy names again, as more LNG capacity (for now) along the Gulf Coast slowly begins to come online.
“For natural gas, we’ll echo our own sentiment that most clients seem to be looking beyond 4Q2023 results at this point,” the TPH analyst said.
Don’t be surprised if some E&Ps shift their growth plans lower as the year progresses, “given where the strip sits,” Portillo said.
TPH is forecasting Henry Hub gas this year would average below $2.75/MMBtu. The U.S. Energy Information Administration in its January Short-Term Energy Outlook forecast Henry Hub spot prices to average $2.60-2.70 in 2024 before increasing in 2025 as liquefied natural gas exports increase and production slows.
BofA Global Research analysts expect U.S. gas supply and demand growth “should hit 1.6 Bcf/d and 2.6 Bcf/d year/year in 2024, pushing stocks to 3.95 Tcf by October.” The BofA analysts are forecasting Henry Hub to average $3.00 in 2024.
What’s The New Normal?
In a recent interview with NGI, Water Tower Research (WTR) analyst Jeff Robertson said even with stagnant natural gas prices, “I wouldn’t really anticipate wide-scale shutdowns mainly because the price of gas probably will still be above the cash costs for production…
“Most producers tend to keep producing their existing wells,” Robertson said. If winter temperatures overall were to remain mild and prices were weak through midyear, “I would anticipate you’d see more producers act with their capital budgets, not to drill new wells to add new supply rather than shutting in existing wells.”
Robertson noted that there have been a “couple of odd, asterisk years between Covid and last year, and it’s kind of hard to come to a new normal.”
The drilled but uncompleted wells, also known as DUCs, began stacking up, and there might be “more of that,” Robertson said.
“What will be interesting to see is in the latter part of or at some point in 2024, it becomes clear that there’s going to be increased export capacity,” he said. “You have to have supply to take that capacity…and putting more U.S. natural gas onto a global market will have an impact on the U.S. price, in other words, the bid away by global customers…And if that happens, that could help natural gas prices, which is probably what’s needed to drill the kind of wells that need to fill the takeaway capacity that we’ll have.”
A lot of rigs moved to the oil-rich Permian Basin as gas prices languished. To bring a rig back to the gassy Haynesville, “you’re going to need to see higher prices to justify the cost to mobilize the rig back,” the WTR analyst said.
Asked when he thought U.S. E&Ps would begin ratcheting up their capital budgets, Robertson said it’s unlikely to be this year. Capital expenditures could be increased in late 2024, but it may not be enough to have a big impact in 2024.
“But I think if you look at ‘25 and potentially ‘26, I would anticipate that gas-directed drilling in the Haynesville in particular, and maybe other gas basins where they can get gas to the Gulf Coast facilities, would start to increase,” Robertson said. “And of course, that’s going to have to be underwritten by stronger natural gas prices.”
Could the North American E&Ps ever return to the days of repeatedly outspending cash flow?
“I think there would have to be a big market shift with investors willing to fund the kind of spending that the industry was undertaking in the early or the beginning of the shale plays, where there was an acreage-capture game,” the WTR analyst said. "And then once you captured your acreage, you had to hold it by production…
“That required a big drilling budget, which was all funded by investors, either equity and debt, and we know…a lot of that capital didn’t really turn out very well.”
The notion of paying dividends to shareholders “is not going to change,” he said. “Total shareholder return that includes the dividend has been proven by some of the companies to be a meaningful way to kind of help to preserve your shareholder returns.”
More Efficiencies, Fewer Rigs
The halcyon days in the Lower 48 of 100%-plus reinvestment rates and new Tier 1 unconventional oil and gas plays are over, but E&Ps still are finding ways to deliver growth, according to Jefferies Equity Research analysts.
“Over the past two years, lower per-foot productivity has driven inventory depth and quality concerns,” the Jefferies analysts said. “Well data supports this. However, the combination of 'above ground' efficiencies (e.g. wells per rig), materially longer laterals and a decline in DUC wells have supported absolute production levels.”
Using various techniques, including cube development, in which multiple wells are drilled on a single pad, should continue to expand opportunities, the Jefferies analysts said.
It’s no longer about the rig count, though.
“Since the peak in November 2022, oil rigs have fallen by 21%,” the Jefferies team said. “Completed wells peaked in April 2023. However, production across key shale oil basins has tracked higher. E&Ps are optimizing drilling efficiency and cycle times across the Lower 48 despite longer laterals.”
A “slight recovery” is forecast for the Lower 48 rig count, but E&P capital spending, adjusted for acquisitions, is projected to be flat.
“The reduction in DUCs has been a core contributor to recent production growth. We believe this is nearing an end,” according to the Jefferies analysts.
The Enverus Intelligence Research (EIR) research team said the energy industry today “is grappling with an atmosphere of deep uncertainty.” Researchers recently compiled what they expect to see in 2024, many of which are similar to what other energy analysts have said.
“In 2024, we expect relative strength in oil versus natural gas prices as OPEC-plus remains in the driver’s seat, and North American producers reckon with another year without material LNG export capacity growth,” EIR’s Dane Gregoris, managing director, said. “Given our rangebound outlook for commodity prices, we expect slowing U.S. supply growth and declining well costs per lateral foot, driven by ever-increasing lateral lengths.
“Producers will remain laser focused on improving capital efficiency and adding low-cost drilling inventory through mergers and acquisitions, and stratigraphic exploration primarily within the Permian Basin,” Gregoris said.
EIR is forecasting OPEC-plus to “steer oil to $90/bbl.” However, LNG delays and a warm winter are pressuring gas prices, and gas is likely to “remain in supply purgatory.”
