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East Daley: U.S. Natural Gas Supply Far Outpaces Demand Signaling Major Price Correction

New Report Bridges the Gap Between Commodity and Equity Market Analysis in the U.S. Natural Gas and Natural Gas Liquids (NGLs) Markets

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Centennial, CO – June 8, 2017
East Daley Capital Advisors, Inc., an energy assets research firm redefining how markets view risk in midstream and exploration and production (E&P) companies, released a new report signaling the need for a major correction to U.S. natural gas prices due to prolific production expectations from the Marcellus and Utica shale formations in the Northeast, which is now clashing with growth expectations in the Permian region in the Midcontinent. The newly released Part Two of the report, “Righting A Wrong: The Marcellus/Utica Balanced on a Knife’s Edge,” dissects the interconnection between energy market fundamentals and a company’s financial performance to create a unique and comprehensive market outlook.

“Given the current forward curve, U.S. natural gas supply and demand are extremely unbalanced, with total U.S. supply outpacing demand by a staggering 11 Bcf/d by the end of 2019,” said Justin Carlson, VP and Managing Director, Research at East Daley Capital. “This signals a necessary price correction to incentivize incremental natural gas demand to help absorb the new production, much of which is expected to be produced in the Northeast and the Permian.”

Part One of this report focuses on growth limitations in Northeast Marcellus. Part Two of this report analyzes southwest Marcellus and Utica as well the implications on the rest of the country due to production growth in the Northeast.   Producer guidance in the Northeast suggests production will grow by 14.5 Bcf/d by 2019. However, the Marcellus and Utica are not without competition as East Daley expects fundamentals will slash northeast growth to 11 Bcf/d as natural gas prices adjust to accommodate surging associated gas production in the Permian. The implications of this analysis also extend to investors, midstream companies and commodity market players outside the region as the Marcellus and Utica will put substantial pressure on other producing regions.

“Basins like the Rockies, Haynesville and the Fayetteville need to pay close attention to what happens in the Northeast as those tier 2 and tier 3 basins are facing an uphill battle for market share and will most likely need to reduce their growth and earnings expectations,” said Carlson. “The U.S. natural gas market is entering into an intense era of gas-on-gas competition where only the best positioned will survive.”

Key findings from Part Two (released June 2017) include:

  • Given the current forward curve, U.S. natural gas supply and demand is unbalanced, with total U.S. supply outpacing demand by a staggering 11 Bcf/d by 4Q19. This signals a natural gas price correction to incentivize 4 Bcf/d of new demand and rationalize 7 Bcf/d of supply.
  • Rationalization of supply will reduce growth expectations from Tier 2 and 3 basins, impacting interests in E&P companies and midstream assets without MVC’s.
  • Producer guidance in the Northeast suggests production will grow by 14.5 Bcf/d by 2019. East Daley expects fundamentals will slash Northeast growth to 11 Bcf/d as natural gas prices adjust to accommodate surging production growth in the Permian.
  • Over $2.5 billion in contractual capacity commitments by producers to long-haul pipelines creates a significant incentive to produce for cash flow generation to cover those commitments.
  • To meet these financial commitments, producers will only need to increase rig count by 8 in the Southwest Marcellus/Utica and by 10 in the Northeast Marcellus.
  • Heavy reliance on LNG and LPG exports from substantial single sources of demand creates variable risk for supply should a project get canceled or have operational downtime.

Key findings from Part One (released May 2017) include:

  • Expansions out of northeast Pennsylvania (NE PA) will result in $1.9 billion in EBITDA split almost evenly between midstream gathering and long-haul transportation.
  • Higher-risk long-haul transport projects account for $182 million in transportation EBITDA but $254 million in midstream gathering EBITDA.
  • Productive capacity for producers in NE PA is limited to 14.2 Bcf/d, 5.2 Bcf/d higher than current production levels.
  • Cabot, Chief, Seneca and Shell will all see over 100% increases in production growth.  
  • Williams Partners (WPZ) will realize an upside of $658 million from NE PA, driven by production linked through their gathering systems to new long-haul expansions.
  • ETP’s NE PA gathering system will almost double from 16% to 28% of midstream segment EBITDA.

Companies covered in this report include:

Part One –

Part Two –

Alta Resources

Antero Midstream

Appalachian Midstream Partners

Antero Resources

Boardwalk Pipeline Partners

Ascent Midstream Partners

Cabot Oil and Gas

Blue Racer Midstream

Cardinal NE Midstream II

Chesapeake Energy Corporation

Chesapeake Energy

Columbia Midstream Group

Chief Oil and Gas

Cone Midstream

DTE

Consol Energy

Energy Corporation of America

Energy Transfer Partners

Energy Transfer Partners

Enterprise Products

Howard Energy Partners

EQT Midstream

National Fuel Gathering

Gulfport Energy Corporation

Repsol

HG Energy

Repsol Oil and Gas Canada

Kinder Morgan

Royal Dutch Shell

MPLX

Seneca Resources

Range Resources

Southwestern

Rice Midstream Partners

UGI Corporation

Rice Energy

Unit Corporation

Southwestern Energy Company

Williams Partners

Utica East Ohio Midstream

XTO Energy

William Pipeline Partners

 

East Daley’s asset-level allocation model, combined with in-depth analysis, brings greater transparency to the midstream energy financial market by providing investors with deeper, more accurate data to inform their investment decisions.

For a complimentary copy of the overview of Righting a Wrong, Part Two, please email insight@eastdaley.com.

About East Daley Capital Advisors, Inc.

East Daley Capital is an energy assets research firm that is redefining how markets view risk for midstream energy companies. In addition to using top-level financial data to predict a company’s performance, East Daley delivers asset-level analysis that provides comprehensive, fact-based intelligence. Supported by a team of unbiased, experienced research analysts, East Daley provides its clients unparalleled insight into how midstream companies operate and generate cash flow. East Daley uses publicly available fundamental data and intersects that data with a company’s reported financials to asset-level cash flows.  The result allows for more informed portfolio decisions. Founded in 2014, the company is based in Centennial, Colorado. For more information visit http://www.eastdaley.com.

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