In the shale field that helped launch the U.S. natural gas boom a decade ago, Chesapeake Energy Corp this month set aside its last drilling rig. The problem for the once No. 2 U.S. gas producer was not a lack of gas, but too much of it.
A long, steady increase in U.S. gas production – much of it a byproduct of the shale oil boom – has prices for the fuel heading toward a 25-year low, with output outpacing U.S. consumption and expected to hit 91.6 billion cubic feet, up 10% over last year, according to government and industry estimates.
Producers have sought to turn much of the U.S. surplus to liquefied natural gas (LNG) and export it. But even with rising sales in Asia and Europe, global LNG prices have tumbled this year as new export plants opened.
This month, 16% of active U.S. drilling rigs were seeking natural gas, the lowest in more than 30 years, according to data from oilfield firm Baker Hughes Co.
Today's gas glut was not expected a few years ago. U.S. steel and chemical makers fiercely lobbied against U.S. exports in 2012, arguing they would lead to price spikes for consumers.
Weak prices show how misplaced those concerns were, said Tom Choi, a gas expert at consultancy Berkley Research Group. U.S. natural gas could remain under $3 per million British thermal units (mmBtu) "for at least the next decade," he said.
That may be too optimistic. IHS Markit projects U.S. gas prices next year will average below $2 per mmBTU, the lowest prices since 1995, and down from the current about $2.70.
Chesapeake spent billions of dollars over two decades to acquire drilling rights on 13 million acres (5.3 million hectares), ran television commercials to promote the use of natural gas and for a time was second largest U.S. producer after Exxon Mobil Corp. It has fallen to No.6 and is having to sell assets to reduce $9.7 billion in debt, which will further reduce its gas output.
It discovered the prolific Haynesville field in 2008, but now is letting production in the northern Louisiana and east Texas field once dubbed “the most revenue generative gas play in the U.S.” decline because of low prices, finance chief Domenic Dell-Osso Jr told investors in August. Chesapeake declined interview requests and written questions.
The company is "stuck between a rock and a hard place," with about 2-1/2 years of liquidity left if it cannot refinance the debt or sell enough properties, estimates Matt Portillo, an analyst at Tudor, Pickering, Holt & Co.
It needs at least $3 billion to $4 billion in asset sales to bring its debt in line with peers, say analysts.
The company's notes due in 2025 are trading at 68.5 cents on the dollar, according to Refinitiv IBES, compared with 89 cents for rival gas producer Southwestern Energy Co. Chesapeake recently swapped some debt for common stock, helping send the share price to about $1.41, near the lowest level in 20 years.
"We do see some risk there," said Jody Team, a portfolio manager for Monteagle Funds, which holds Chesapeake shares.
Given how investors have dumped shares in shale acquirers, it is hard to see Chesapeake "being able to offload any of its major assets at an attractive price," said Leandro Gastaldi, portfolio manager at Blue Quadrant Capital Management, which holds shares in Chesapeake. The company could help its bottom line by producing more oil, Gastaldi said.
Oil majors, with diversified portfolios, have weathered the downturn in gas prices, too, but have been rapidly growing their more profitable shale oil production.
Chesapeake, too, spent nearly $4 billion in cash and stock to acquire Texas producer WildHorse Resource Development a year ago to boost oil output. But about three-quarters of its current production remains gas, according to its second-quarter results.
Chesapeake is expected to post a third-quarter loss of $182.2 million on Tuesday, according to Refinitiv IBES. It is expected to trim next year's spending on exploration and development by about a third, said Portillo. The cuts could reduce gas production by 1 billion cubic feet per day, he said. Chesapeake has not yet disclosed its 2020 budget.
Other shale companies focused on gas production will pare spending by 25% or more compared with this year, said Portillo, citing the price weakness. Apache Corp shut in some of its West Texas wells to await better pricing and EQT Corp recently cut a quarter of its staff to reduce spending.
Reporting by Jennifer Hiller