PITTSBURGH – That sharp “whack” you heard coming from this city’s David L. Lawrence Convention Center last Friday was one of the oil and gas industry’s own smacking the industry upside its collective head.
Steve Schlotterbeck, who spent roughly 18 years at EQT Corp., the last one as president and CEO – the man in charge as EQT wound its way through the maze required to acquire fellow Western Pennsylvania-based independent producer Rice Energy and become the U.S.’s largest gas producer – addressed the Fourth Annual North East Petrochemical Conference & Exhibition. Kallanish Energy was in attendance.
His presentation was entitled “The Mighty Marcellus – Coming of Age,” and he did begin his talk addressing how the Marcellus and Utica Shale plays have grown in terms of production and the benefits to all.
But when Schlotterbeck shifted to what he called industry “headwinds,” he spent most of his 35 minutes excoriating his compatriots.
“The biggest problem is the shale gas revolution has been an unmitigated disaster for buy-and-hold investors in the shale gas industry,” said Schlotterbeck, who left EQT last year, with one of the reasons his disagreement with the board on the direction the company should take.
“I’m not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.”
“The industry is self-destructive – it’s technological suicide.”
Schlotterbeck pointed to the last major correction forced upon the O&G industry, when, in 2015, more than 100 exploration and production companies went bankrupt.
Since January 2008, Schlotterbeck said the Nymex is down 70%, while the Northeast basis has plunged in the last 11 years from a 25-cent premium to Henry Hub, to -40 cents.
And producers’ own numbers are, in a word, horrible. Reported spending outweighed income for a group of 29 U.S.-focused oil and gas exploration and production companies by $6.69 billion in 2018, bringing the group’s 2010 to 2018 total cash flow to -$181.09 billion, according to a March 2019 report from the Institute for Energy Economics and Financial Analysis.
“Yet, growth continues (in the industry),” Schlotterbeck said. Global gas demand was up 5% in 2018. U.S. natural gas production jumped 12%.
Schlotterbeck told his audience what amounts to a broken industry can be fixed following three steps:
* Reduce drilling for one to two years
* Return more company cash to investors via higher dividends and stock buybacks
* Utilize capital for balance sheet strength
And, while the natural gas industry’s continuing low prices make consumers, like the petrochemical industry, but users as a whole, smile, Schlotterbeck said the low prices and a healthy industry do not mix.
Producers need higher prices
“Higher gas prices are needed for the industry’s health,” he said. “The sweet spot would be between $3.50 to $4 per Mmbtu (million British thermal units), $2.60 at the wellhead.”
At the Friday conference, he displayed a PowerPoint screen showing the stock prices of eight major Marcellus shale gas producers: Antero Resources, Range Resources, Cabot Oil and Gas, Southwestern Energy, CNX Gas, Gulfport, Chesapeake Energy, and EQT, the company he ran.
Seven of the eight companies saw their stock prices fall between 40% and 95% since 2008, the slide showed. Only Cabot showed positive movement in its stock price
Balance supply and demand, or bankruptcies return
“Excluding capital, the big eight basin producers have destroyed on average 80% of the value of their companies since the beginning of the shale revolution,” Schlotterbeck said. “This is not the fall from the peak price during the shale decade — this is the drop in their share price from before the shale revolution began.”
“Supply and demand rebalancing is necessary – if not, we will see another wave of bankruptcies,” according to Schlotterbeck.
The former EQT chief executive, who now is a special partner at boutique investment bank Stone Pier Capital in Pittsburgh, said there is a very real opportunity for one producer to propose a strategy Schlotterbeck put forth to fix the industry and, given O&G’s herd mentality, it might start the positivity to flow.
Investors certainly are fed up with the status quo, with external capital just not there to continue business as usual.
“The industry is broken – but a lot of companies still don’t get it,” according to Schlotterbeck said.
This post appeared first on Kallanish Energy News.