The U.S. natural gas sector is facing a challenging period as prices plummet, leading to significant shifts in the industry’s operations and strategies. A dramatic 46% drop in natural gas prices this year is causing a ripple effect across the U.S. shale patch, with drilling activity slowing and deal-making cooling. This downturn is notable given that just six months ago, U.S. gas was a highly sought-after commodity, especially as global demand surged and Russia reduced its gas flows to Europe. The number of active gas-drilling rigs had increased by about 48% to 157 in the first six months of 2022, a trend that is now expected to reverse.
Companies are responding to the low-price environment by cutting back on their operations. For instance, Comstock Resources announced plans to reduce its active drilling rigs from seven to five and suspend dividend payments until natural gas prices recover sufficiently to generate profit. Similarly, Antero Resources is planning to cut its drilling budget by more than a quarter and reduce its rig lineup and completion crews.
The decline in natural gas prices has been attributed to warmer weather and a prolonged outage at an LNG export plant, with U.S. gas futures dropping to $2.42 per million British thermal units (mmBtu), a stark contrast to the over $9 per mmBtu seen in August 2022. This price level is the lowest in three and a half years and represents a significant deviation from the $5.46 per mmBtu average of last year, which was the highest price in over a decade.
Analysts predict that gas drilling activity will need to decrease to prevent storage from exceeding the U.S. maximum of 4.3 trillion cubic feet (tcf), particularly in regions like Haynesville. The continued low-price environment also casts a shadow over merger and acquisition activity within the sector, with some proposed acquisitions threatened by the current market conditions.
Looking ahead, the industry faces a delicate balance. While current spot prices are low, futures for January and February 2024 are trading above $4 per mmBtu, suggesting some optimism for a price recovery. This forward market pricing indicates that while the immediate future may be challenging, there is an expectation of price improvements that could stabilize the sector. Nevertheless, companies and investors will need to navigate the current downturn carefully, adjusting their strategies to manage the risks associated with low natural gas prices while positioning themselves for future opportunities.
This situation underscores the volatility of the natural gas market and the challenges that producers face in adapting to rapidly changing market conditions. As the industry adjusts to this new reality, the coming months will be critical in determining how well U.S. shale operators can weather the storm of low prices and set the stage for a potential recovery.
