Photographer: Daniel Acker/Bloomberg

Three Things Wall Street Should Look for in Gas Driller Earnings

Updated on
  • Northeast pipeline additions seen boosting Marcellus output
  • Investors may reward explorers for spending within cash flow

Hurricane disruptions, new pipelines and see-sawing natural gas prices contributed to an eventful third quarter for the companies that extract the fuel from shale basins across the U.S. Here are three things to keep an eye out for this earnings season:


Though Hurricane Harvey temporarily cut gas output from Texas shale reservoirs in August and September, production is poised to rebound in the fourth quarter led by producers in the U.S. Northeast after pipelines like Energy Transfer Partners LP’s Rover project start service. These new lines will probably come close to operating at full capacity, Subash Chandra, managing director and senior analyst at Guggenheim Securities LLC in New York, said by phone.

“You can’t just really fill the new pipes by just redirecting prior gas flows,” Chandra said. “You’re going to have to drill more.”

Gas production in the Northeast hit a record 24 billion cubic feet a day in September. This month, production has fluctuated as stiff competition for service crews delayed drilling in some areas, James Sullivan, an analyst at Alembic Global Advisors in New York, said by phone.

Seeking Returns

While gas output is set to climb, gone are the days when production growth is enough to appease shareholders. Now investors want returns, pushing companies to spend within cash flow in order to repair balance sheets, Matthew Portillo, managing director of E&P research at Tudor Pickering Holt & Co. in Houston, said by phone.

“Capital discipline is a huge thematic conversation with investors today,” Portillo said. “It’s really the driver of equity performance in our view over the last five to six months.”

Hedging Boost

Until recently, there were few conduits to carry gas from the Marcellus shale basin in the Northeast to markets in other parts of the country. That meant that production from the region has historically been priced at local hubs like Dominion South Point in western Pennsylvania, where prices tumbled as pipeline bottlenecks left a glut of supply.

That’s about to change as the Rover line and other links begin service, allowing producers like Range Resources Corp. and Cabot Oil & Gas Corp. to hedge production -- or lock in prices for future output in case of a slump -- using gas for delivery at Louisiana’s Henry Hub, the benchmark for U.S. supply.

Pipeline expansions will allow producers “greater ability to hedge their production profile on a Henry Hub” basis, Portillo said. “Historically, they have not been able to access Henry Hub. Three dollars is kind of the new target for management teams.”

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