While oil struggles, natural gas demand and production from the Appalachian and Haynesville basins hangs tough

Natural gas plays where two upstream and one midstream Oklahoma City-based companies are active are hanging tough so far this year as the COVID-19 pandemic continues.

Enverus, an on-demand software and data analytics company that follows the oil and gas industry, highlighted encouraging trends seen in the Appalachian and Haynesville basins in its Enverus FundamentalEdge series report released earlier this month.

While drilling activity is down in both basins, it hasn’t fallen as much in those as it has in other oil-focused onshore shale plays.

Plus, the report notes that production from those basins recovered to about where it was before energy markets collapsed, said Maria Sanchez, an energy market analyst at Enverus who focuses on natural gas fundamentals.

“The impact of the COVID-19 pandemic and the price war between Russia and Saudi Arabia really drove oil prices down,” she said. “So we have seen a lot of shut-ins on wells in April and May, especially in the oil-focused plays.”

Pipeline flow data showed Enverus that natural gas production from the Appalachian and Haynesville initially dropped by about half earlier this year, but has since rebounded, Sanchez said.

Further, Enverus estimates total natural gas production from both basins will continue to climb between now and the end of next year, even as total natural gas production nationally falls.

The anticipated gain to is due to an expectation numerous pipeline products will become operational between now and mid-2023 that will move the natural gas from where it is produced to where it either is consumed on the East Coast or exported from the Gulf Coast.

Two plays with steady demand

The Appalachian, generally referred to as the Marcellus and Utica Shale fields, are active operational areas for both Chesapeake Energy Corp. and Ascent Resources Utica Holdings.

Enable Midstream Partners gathers, processes and ships gas from wells in the Haynesville in Texas and Louisiana.

While Ascent Resources cut the number of rigs it was using to drill in the Utica from three to two, Chesapeake actually doubled the number of rigs operating in the Marcellus, from two to four. Chesapeake also is operating one rig in the Haynesville.

Part of the underlying support for the Appalachian and Haynesville basins is because natural gas associated with harder hit oil-producing areas in North Dakota, Colorado, Texas, New Mexico and Oklahoma was removed from the production stream when exploration and production work in those fields dramatically slowed, the report showed.

That supported natural gas pricing, which in turn incentivized production from the primarily gas producing plays.

At least four pipeline projects are currently in the works to boost the amount of natural gas transported from the Haynesville to the Gulf Coast.

Among those are a 135-mile line called the Gulf Run Pipeline that Enable Midstream Partners already cleared with federal regulators and is working to build. The line is expected to be in service by the end of 2022.

The Haynesville was producing a daily average of about 11.73 billion cubic feet of natural gas at the start of 2019, and Enverus expects that to climb to about 12.57 billion cubic feet by the end of next year.

In September, the number of rigs drilling wells in the play was down by about 35%, compared to the start of the year — only about half as bad as what has been seen nationally, where the number of working rigs declined by 70%.

While rig activity in the Appalachian fell nearly 50%, the Utica and Marcellus Shale fields held a large number of drilled, uncompleted wells companies are working to bring online. Operators brought 189 of those wells to market by Aug. 19.

Chesapeake whittled away at its number of drilled but uncompleted wells in the Marcellus, taking it from 18 at the start of this year to just four last month.

The average daily production from wells in the Appalachian was 32.72 billion cubic feet at the start of 2019. By the end of 2021, Enverus estimates it will have climbed by more than 2 billion cubic feet daily to 34.91.

Enverus expects cumulative natural gas production across the nation will fall by nearly 4 billion cubic feet over that same time period, from about 96.6 billion to about 92.7 billion cubic feet per day.

While demand for oil-related downstream products like gasoline and jet fuel fell because of the economic lock-down implemented to slow the spread of COVID-19, it remained pretty constant for natural gas used to generate electrical power and other for other industrial-related needs, Sanchez noted.

“And at the end of the day, because natural gas is so seasonal, demand for it will increase this winter," Sanchez said. "The Appalachian and Haynesville basins are the ones that will have to respond."

What it means for Ascent, Chesapeake

While encouraging, the outlook won’t be a lifesaver for either Chesapeake or Ascent, given both are dealing with significant debt loads.

Chesapeake, which in early 2019 made a big pivot toward becoming an oilier producer to only see the commodity’s value collapse, is currently working its way through a bankruptcy case it filed in Texas.

Ascent Resources Utica Holdings, a private company spun out of Aubrey McClendon’s American Energy Partners before it closed, reached an agreement last week with investors holding a majority of its debt to shift its obligation to retire it into the future.

Through a deal it negotiated with investors that hold about 60.6% of the debt, noteholders will be given an opportunity to swap out 10% notes due to be retired next year with new notes due in 2025 and 9% notes due in 2027, up to an aggregate principal amount of $538 million.

The company is asking as part of the exchange offer for consent from noteholders to eliminate substantially all restrictive covenants and certain default conditions associated with the debt as part of the deal. Its offer expires Oct. 7.

Jake Dollarhide, CEO of Longbow Asset Management in Tulsa, said Ascent Resources aims to push off the majority of what it owes investors with a hope that markets eventually will improve.

“This is a survival tactic being used by countless over-leveraged companies across a broad spectrum of industries,” Dollarhide said. “They are extending the maturity of their bonds to keep their companies going. If you can’t retire the debt, you’ll go into bankruptcy.”