Despite crashing prices, executives at EQT Corp. said the U.S. natural gas market is not as oversupplied as most think, suggesting the stage is being set for a rebound.
Henry Hub has traded below $2/MMBtu for seven straight sessions. The contract hasn’t been this low since June 2020 during the Covid-19 pandemic. NGI’s Weekly Spot National Avg. price has also been under pressure for four weeks in a row, weighed down by near record production and mild winter weather.
But CFO Jeremy Knop pointed to a “prominent data vendor” that lowered its year-to-date supply estimates this week, suggesting fundamentals aren’t as bad as they seem.
“We had suspected certain data sources were overstating production, and this downward revision validated the market is not as oversupplied as many previously thought,” Knop told financial analysts on Wednesday during a call to discuss the company’s 2023 results.
He added that if production stays flat at the current revised level and weather is normal through the injection season, end-of-summer inventories would be “roughly in line with the five-year average level.”
EQT, an Appalachian pure-play and the nation’s largest gas producer, produced more than 2 Tcfe last year. The company isn’t ready to pull back the reins any more than it already has as it prepares for the other side of the downturn.
“We continue to be really bullish,” Knop added. “The next six to nine months might be a little bumpy. We continue to have the view – and you’ve already started to see it with some of the earnings guidance coming out this quarter – that really a curtailment of activity is going to amplify the upside as we get into next year. We remain well positioned to capture that as much as really anybody.”
Cutting activity is something “we, like everyone of our peers, is probably thinking about everyday right now…The market is not only asking for production curtailments, but also activity reductions,” Knop said, noting EQT already has taken some steps in response to those expectations.
The company is guiding for 2.2-2.3 Tcfe of gas production this year, down by about 50 Bcfe from preliminary guidance it released last month.
“I would characterize that as a response to the price environment we’re in to make sure there’s flexibility and EQT can respond,” Knop told analysts.
He said, however, that Appalachian production peaked at just under 37 Bcf/d in December and has fallen by 1.5 Bcf/d since. The company expects further declines through the second quarter, Knop said.
Power To ‘Take The Torch’
Looking ahead, management expects natural gas demand for power generation across the country to increase by 20% by 2030. A lack of storage capacity relative to demand, along with limited coal-switching and more intermittent renewables are likely to create more price volatility.
In Appalachia alone, Knop said grid operator PJM Interconnection expects another 10 GW of electricity demand by 2030. If that is met with gas, he said it would translate into another 2 Bcf/d of demand.
Management said the outlook improves for producers in the Northeast this year as the Mountain Valley Pipeline (MVP), which would move 2 Bcf/d from Appalachia to the Southeast, is expected to come online.
“This trend of increasing local demand, juxtaposed against relatively flat basin supply and the commencement of MVP should provide a structural tailwind for local pricing over the coming years" that isn’t baked into the futures market, Knop said.
EQT has firm sales contracts on MVP for 1.2 Bcf/d beginning in 2027 that are expected to improve corporate differentials later that year, particularly as infrastructure in the southeast is expanded further downstream.
NGI Forward Look data shows Transco Zone 4 prices, the most liquid trading point in the Southeast, closer to $5 towards the end of 2027. That’s compared to current prices that are below $2.
“We stand ready to be a supplier and support that project,” Knop said of MVP. “I think there's ample demand in that southeast market with data center buildouts really underpinned by the [artificial intelligence] revolution right now and population growth that's really pulling on gas for absolute power demand.
"Power, in our view, as you look toward the end of this decade, is becoming as bullish of a thematic tailwind as LNG. It will probably really take the torch from LNG in the coming years."
The ‘World Has Spoken’
EQT also continues to advance a strategy to gain more exposure to international gas prices. It has signed non-binding heads of agreements for 2.5 million tons/year of liquefaction capacity at the Lake Charles, Commonwealth and Texas liquefied natural gas projects.
CEO Toby Rice said that despite the Biden administration’s pause on new LNG export authorizations, the world will need more gas.
"The world has spoken, deeming natural gas is critical to the energy transition, while ensuring energy security,” Rice said. “It is abundantly clear that nations around the world powered by coal desperately want and need greater access to natural gas, and ultimately, political posturing will reconcile with this reality if we as a society are truly intent on achieving global climate goals."
Fourth quarter production came in at 546 Bcfe, compared to 459 Bcfe in the year-ago period. Volumes were lifted by a deal to acquire Tug Hill Inc.’s upstream and midstream assets in West Virginia that closed in 3Q2023.
EQT expects capital expenditures of $2.15-2.35 billion in 2024, up from 2023 levels mainly due to higher transportation expenses and inflation. Most of the budget is set to be spent on maintaining operations. However, up to $300 million is slated for strategic growth expenditures for further infill leasing, mineral purchases, midstream and water infrastructure.
Management also said the company is entertaining a renewed interest in its non-operated assets, particularly from international companies looking for exposure to U.S. natural gas. At the right price, EQT would sell, Knop said.
"We really started exploring that because of inbounds we got, and I think a lot of those buyers are a little less price sensitive than buyers domestically," he added.
Despite wider differentials in Appalachia, management said its strong basis hedge position reinforced the company’s average realized prices during the fourth quarter, which came in at $2.75/Mcfe, compared with $2.87 in the year-ago period.
EQT reported fourth quarter net income of $502 million ($1.13/share), compared with net income of $1.7 billion for the year-ago period.
For the full year, net income was $1.7 billion ($4.22), compared to $1.8 billion ($4.38).
