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Opportunity: Big Investors Commit Financial Suicide by Avoiding O&G
Small investors have a golden opportunity. Oil and gas companies (drillers in particular) are more profitable than ever, yet many large investors are avoiding and will not invest in them. Why? Because they’re idiots? Well, yes, that’s one reason. But the root cause is they have been cowed by loud-mouthed environmental extremists. Threatened by them. Oil and gas companies are still here, still providing a critical service to the world, and still need investors. That’s a great opportunity for small investors–like you.
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Last week Pennsylvania was back on its game, issuing 22 permits to drill new shale wells. Most of the permits in PA were for three well pads by three different operators: Seneca Resources, Repsol, and EQT. Ohio issued just two new permits to Gulfport Energy for the same well pad in Belmont County. West Virginia issued four new permits, three of them to Southwest Energy and one to Antero Resources.
A healthy number of permits were issued to drill new shale wells across the Marcellus/Utica region last week. Pennsylvania issued 19 new permits in both southwest and northeast PA. Ohio issued 8 new permits, all of them to a single driller (Ascent Resources) for two well pads in two different counties. West Virginia issued 9 new permits–all but 2 of them were issued to Antero Resources in Tyler County.
We’ve noticed nearly all of the public companies (and many private companies) in the oil and gas space are talking about their ESG (environmental, social, governance) programs. There’s a lot of hot air surrounding ESG programs. How does one separate out fact from fiction? Enverus, the company that produces (in our opinion) the best and most accurate weekly rig count numbers, has a solution. Enverus has developed a new framework/system to compare one oil/gas company’s ESG efforts against its competitors. Of the top 10 best ESG programs in the oil and gas industry are four companies (drillers) in the Marcellus/Utica. Coming in at the #1 position is none other than the largest natural gas driller in the country: EQT.
Although the price of natural gas has rocketed this year and cash flows for Marcellus/Utica drillers have ballooned, showering drillers with plenty of free cash flow, M-U drillers are spending less (19% less) on capital expenditures than they did in 2020. Production in the M-U is up slightly by 4% so far in 2021 vs. 2020. The experts at RBN Energy have dived into this latest twist in the shale story to help explain what’s going on and why.
A recently published book that attempts to show fracking in Lycoming County, PA area in the worst possible light, along with a section excerpted from the book running in the New York Times, once again reopens an old case that accuses Range Resources of ruining the water supply for several homes near a fracked well drilled by Range. In 2011 Range drilled and fracked the Harman Lewis Unit 1H well along Green Valley Road in Hughesville, PA. Following an investigation, the PA Dept. of Environmental Protection (DEP) slapped Range with a record $8.9 million fine in June 2015, accusing the company of faulty casing in its well, leading to methane migration that had contaminated several area water wells (see 
Because of the soaring price of natural gas (see our companion post today), and because gas drillers have shown remarkable restraint and a real effort to scale back capital spending in an effort to generate free cash flow, investors have taken note and like what they’ve seen. The share price in most pure-play shale gas producers (mainly those in the M-U) posted double-digit gains in value over the past month.
During the second quarter (May through June), ten of the largest oil and gas producers covered by S&P Global Market Intelligence saw their NGL (natural gas liquids) revenues grow substantially from the same period a year ago. Those ten companies, half of them drillers in the Marcellus/Utica region, saw NGL prices increase from 104% to as high as 261%. The extra money from NGLs made what turned out to be a down quarter financial-wise (because of bad bets on hedges) better than it would have otherwise been.
Range Resources, the very first company to sink a Marcellus Shale well (back in 2004), reported on second quarter results earlier this week. Range produced an average of 2.10 billion cubic feet equivalent per day (Bcfe/d) in 2Q, of which 31% was “liquids” or NGLs, like ethane and propane. In fact, Range’s NGL production was in the limelight, earning the company its highest price for NGLs ($27.92 per barrel) since 2014. However, even with the boost in NGL prices, the company still lost $156 million for the quarter, which is down slightly from losing $168 million in 2Q20. The company reports generating “significant” free cash flow.
Expectations coming from Wall Street are that pure-play drillers, like many in the Marcellus/Utica, will show a turnaround in their financials for the second quarter of 2021. According to S&P, investors took drillers at their word last year that they won’t “drill baby drill” the way they have in years gone by. The stock prices of nearly all major M-U drillers have soared over the past 12 months as a result. The biggest turnaround has been Antero Resources. Its stock price is up nearly 400% over the past 12 months! Range Resources’ stock price is up 140%.
According to an analysis done by S&P Global Market Intelligence, the five largest drillers in the Pennsylvania Marcellus Shale resumed their drilling in June in a big way. S&P’s analysis shows those five drillers were responsible for 51% of the new drilling permits issued last month, up from 28% of new permits issued in May. Perhaps we know why. The price of natgas at regional hubs in PA rocketed over the past month. At the Leidy Hub in the northeast’s dry gas window (centered on Susquehanna County, PA), cash prices went from a low of 93.7 cents/MMBtu on May 3 to $3.07/MMBtu at the end of June.