M-U Drilling Profits Hit Two-Year Low, Better Days Ahead?
Investors in shale oil and gas companies suffered for years with little or no returns for the money they invested. Five of eight large Marcellus/Utica drillers saw their share prices decrease by an astonishing 85% or more from 2008 to 2019 (see Former EQT CEO: Shale Revolution a “Disaster” for Investors). Just before the COVID pandemic hit, shale companies began to change and focus on less drilling and more profitability, which began to turn things around. Then Russia illegally (and unprovoked) invaded Ukraine, driving oil and gas prices to record highs (see How Did M-U Gas Drillers Spend Their 2022 Record Haul of Cash?). Over the past year (five quarters), prices for gas and largely for oil have once again crashed, and along with it, a crash in profits for drillers.
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New shale permits issued for Jul 31 – Aug 6 in the Marcellus/Utica were down a lot from the previous week. There were 14 new permits issued last week, down more than half from the 29 issued the previous week. Last week’s permit tally included just 4 new permits in Pennsylvania (very low), 14 new permits in Ohio, and no new permits in West Virginia (for the second week in a row). The top permittee for the week was Encino Energy, receiving 8 permits spread evenly between Harrison and Tuscarawas counties in Ohio.
Coterra Energy, formed in 2021 by the merger of Permian oil driller Cimarex Energy and Marcellus gas driller Cabot Oil & Gas, issued its second quarter 2023 update yesterday. The company made far less profit in 2Q23 than it did one year ago, in line with other big Marcellus/Utica drillers. Coterra made $209 million in profit for 2Q23, versus $1.2 billion in 2Q22. Why the drop in profit? The crashing price of natural gas over the past eight months or so. Coterra received an average of $5.54/Mcf (before hedges) for its Marcellus gas in 2Q22, and $1.78/Mcf in 2Q23, a drop of 68%. Ouch. During a conference call with analysts, company management floated a potential plan to free up around $200 million from Marcellus operations in 2024 and reallocate it to other plays (the Permian or the Anadarko) by continuing to run just two rigs and one frac crew in the Marcellus.
TRC Capital Investment Corporation has sent an unsolicited “mini-tender” offer to Coterra Energy stockholders looking to purchase up to 4 million shares of Coterra’s common stock (approximately 0.5% of Coterra’s outstanding shares), at an offer price that is 4.5% lower than the current share price. TRC Capital is looking to pick up Coterra shares on the cheap and turn around and flip them at a higher price. Coterra is warning stockholders they should not agree to the deal.
In October 2021, Cimarex Energy, a Permian driller, and Cabot Oil & Gas, a Pennsylvania Marcellus driller, merged and renamed the company to Coterra Energy (see 
For individuals, discretionary income is what’s left after you pay your taxes and fixed costs like housing, food, and clothing. For shale drillers, the equivalent to discretionary income is cash flow from operating activities (CFOA), which is the net income a company generates adjusted for non-cash expenses like depreciation and stock-based compensation, and for changes in working capital. Drillers can use their extra cash to grow production by spending more for drilling new wells (capital expenditures or capex). Or drillers can send some of the extra cash back to investors via share buybacks and dividends. How did Marcellus/Utica drillers spend their CFOA during the first quarter of 2023?
It’s possible to track which institutional investors (big investors like BlackRock) are buying or selling shares in various companies by reviewing Securities and Exchange Commission (SEC) Form 13F filings. S&P Global Market Intelligence performed a 13F review of which companies bought, and which sold (and how much) shares of stocks for shale gas drillers during the first quarter of 2023. The topmost active shale gas driller having its stock purchased by institutional investors was Comstock Resources, which drills exclusively in the Haynesville Shale. The reason Comstock came out on top, postulates S&P, is because the Haynesville is located close to the Gulf Coast and LNG export plants. However, it was the rest of the list that interested us.
An advisory note from Citi analyst Paul Diamond, picked up by the Seeking Alpha investor website, says U.S. natural gas producers are “primed for a wave of consolidation” in the medium term. Near the top of the list of potential takeover targets is, according to Diamond, Southwestern Energy, which had concentrated mainly on the Marcellus/Utica region until 2021, when it went wandering into Haynesville drilling. Who might be interested in buying Southwestern?
The weather has been fantastic for those of us living in the northeastern U.S. over the past few weeks. Clear blue skies (when they aren’t clouded with wildfire smoke from Canada), really warm temperatures, and absolutely no rain to spoil outdoor activities. Here in the Binghamton, NY area, we went from a surplus of rain and swollen rivers and lakes just a month ago to a rain deficit today. Lawns and fields and beginning to turn brown. Hey, we’re not complaining! But we do need some rain. The lack of rain in the Susquehanna River Basin has triggered water withdrawal restrictions for 42 oil and gas drillers and four other large water users (46 in all) by the Susquehanna River Basin Commission (SRBC). In many cases, the SRBC order is to “cease withdrawal.”
It’s been a wild ride for shale energy companies from the beginning of the shale revolution around 20 years ago. Here in the Marcellus/Utica, the very first Marcellus well was sunk by Range Resources in 2004. Until a few years ago, most shale drillers were not profitable, eating through investors’ money like candy. Just before the beginning of the pandemic, shale drillers got the “free cash flow” religion and began to pull back on new drilling in favor of profitability for shareholders. The pandemic, followed by Russia’s war against Ukraine, added new market gyrations. Bottom line: Last year, shale oil and gas drillers saw historic revenues and profitability. This year, the bottom is dropping out once again…
This is precisely what we feared might happen and why we were against the merger of Cimarex Energy and Cabot Oil & Gas, now called Coterra Energy (see