While many in the market have been focused on what consolidation will come in the major oil plays as a result of the pandemic-driven low oil prices, such as from the Chevron-Noble acquisition, gas producers have also made moves to better position themselves in a low liquids price environment. Most recently, Southwestern announced that it would acquire Montage Resources in an all-stock deal. In addition to making the combined entity the third largest Northeast producer, the Montage assets give Southwestern greater optionality in its SW Appalachia acreage to choose between dry gas acreage when liquids pricing is low and wet gas acreage when liquids pricing is high. This optionality is key at a time when liquids pricing is expected to remain pressured as the world recovers from the COVID-19 pandemic and its resulting impacts to hydrocarbon demand. Today’s energy market commentary will utilize BTU Analytics E&P Positioning Report to analyze Southwestern and Montages acreage and the flexibility afforded to Southwestern by the acquisition.
The maps below compare the Southwestern and Montage acreage based on NGL gallons per Mcf of natural gas, or GPMs, for wells that each company has completed from 2014 to present. The darker grid boxes indicate greater NGL production for each Mcf of gross natural gas, and therefore a greater economic reliance on NGL pricing. By adding in the dry acreage from Montage (map on the lower right), Southwestern is able to shift activity acreage with lower liquids exposure as gas prices rise in 2021. As the global recovery from COVID-19 progresses, leading to a recovery in global liquids demand, Southwestern may choose to shift back to its wet gas acreage to capture higher crude and NGL pricing.
This shift between dry and wet gas acreage is evident in the breakevens that BTU Analytics models for horizontal wells in the major shale plays, as featured in the Oil & Gas View. The chart below shows the distribution in breakevens for Southwestern and Montage wells completed in SW Appalachia from 2018-present. To illustrate the increased reliance on NGL prices that legacy Southwestern wells generally have, both company’s well-level breakevens were calculated at a $60/bbl and $30/bbl oil price deck. At $60/bbl, nearly half of Southwestern wells show a breakeven of $2/MMbtu or less, compared to about 40% for Montage. When the oil price is reduced to $30/bbl, less than 10% of Southwestern wells breakeven below $3/MMbtu, compared to 35% for Montage. While Montage wells are certainly impacted by liquids pricing, the greater access to dry gas acreage provides a buffer against volatile oil and NGL pricing.
BTU Analytics has analyzed NGL uplift and how that impacts producers development in the past. With liquids pricing expected to remain low in the near-term, the NGL uplift on most wet gas wells has likely disappeared. The Montage acreage gives Southwestern the ability to capitalize on higher natural gas prices, as BTU Analytics forecasts that Henry Hub will rise above $3/MMbtu in 2021, without significantly drilling through wet gas acreage that could generate greater cash flow in the future.
The combination of acreage positions from Southwestern and Montage gives the combined company better development optionality in a market reeling from extreme disruption over the last 8 months.