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Upside In A Down Market: Northeast Gas Dynamics To Advantage Regional Midstream Companies

Source: Seeking Alpha April 18, 2020

Natural gas markets will slide into undersupply as crude production declines and takes associated gas down with it.

Through the recession, demand for natural gas will continue to grow driven by power gen and LNG export sectors.

The two primary dry gas basins will not respond with new drilling until prices exceed at least $2.75-$3.00/MMbtu.

As Northeast gas macro forecast is refined, expect a 40% increase in drilling activity and earnings upside for assets levered to highly economic natural gas basins like the Marcellus and Haynesville.

For investors familiar with the oil and gas sector, it seems logical that a shift in drilling for oil reduces natural gas supply as well. However, getting comfortable with the rest of the logic around demand shifts, balancing wet basin losses with dry basin increases and ultimately delineating impact to midstream companies makes quantifying the impact much harder. When we crunch the numbers through our commodity models and company financial models, the story that plays out is that the drop in oil production creates a shift to an undersupplied gas market that will cause the natural gas forward strip to move up to increase supply, resulting in upside for Northeast midstream companies like Williams (WMB). To understand this, we can look at four areas: demand, associated gas supply, dry gas supply, and company impact.

Demand

To understand what happens if billions of cubic feet of associated gas (natural gas produced as a byproduct of oil drilling) stay home, we first need to dig into the potential impact to demand. Ultimately, demand is the lynchpin. As shown in Figure 1, our expectation is that natural gas demand is largely inelastic, and while some virus-related reductions can be expected, steadily increasing gas demand for electric power production, Mexico exports, and liquefied natural gas exports will drive the U.S. market to be undersupplied. Read the full article on Seeking Alpha.