The head of one of Appalachia's largest shale gas producers said the region's drillers are heading for a crackup if they keep producing more gas in the face of the current low commodity prices.
"I have a hard time rationalizing why industry is growing into the market today," Cabot Oil & Gas Chairman and CEO Dan Dinges told analysts on the company's fourth-quarter 2019 earnings call Friday. "I do think ... rationalization is going to have to prevail in this market that's not sustainable, and the balance sheets are not sustainable out there."
"I don't know why anybody would be drilling wells ... as a growth measure into this market," Dinges said.
Cabot is dialing back its 2020 capital spending to $575 million, a 27% drop from 2019, and will be laying down one of its three rigs in March. Cabot's guidance for the first quarter calls for roughly 2.375 Bcfe/d of natural gas production, 3% less than the fourth quarter of 2019.
The driller, which said it generates positive cash flows at $2/Mcf gas prices, is ready to clip its activity further if prices stay low, Dinges said. "We are at a maintenance level of capital because we don't think it is prudent to drill up all your core inventory and push it out at a losing proposition."
"The company continues to analyze the outlook for the natural gas markets in 2020 and beyond, and is prepared to reduce capital spending further if market conditions warrant it," the company said in its earnings release.
"Given the strong contango in the natural gas forward curve, this capex and production cadence works in [Cabot's] favor," Stifel Nicolaus & Co. shale gas analyst Jane Trotsenko told her clients before the call. "What is incremental in today's press release is that the company would consider reducing capital spending further should market conditions justify it."
Cabot reported realizing $2.15/Mcf for its gas production in Q4, a 31% drop from the same period a year ago, while still generating free cash flows of $109.5 million and adjusted income of $120.8 million, or 30 cents per share, a 55% drop from Q4 2018 and just under analysts' expectations.
Dinges reiterated Cabot's intention to use 50% of the free cash flow to pay dividends with some of the remaining 50% used to retire some of Cabot's debt. He steered clear of any discussion of using the extra cash to buy assets in a market where many other producers are trying to unload assets to fix their balance sheets.
"To have an M&A transaction, it's just cumbersome," Dinges said. "Trying to make that come together to get all the stars lined up all at one time, it's a difficult proposition. That's why it's not done every day."
"We're going to be the last man standing, and we're going to take advantage of our position, maintain our balance sheet, serve our shareholders, hopefully in a way that the long-term shareholders would appreciate," Dinges added.
