Arkansas drops out of top ten natural gas-producing states, yet futures prices on the rise

by Wesley Brown ([email protected]) 764 views 

Rig operation in Arkansas' Fayetteville Shale Play. (Image from BHP)

Arkansas is no longer among the top ten natural gas producing states as the recent drilling and sales decline in the Fayetteville Shale and the industry’s shift to more lucrative to oil rich shale plays has caused production in the state to decline nearly 20% over the past year.

The good news, however, is that natural gas prices toughed a one-year high just ahead of the Fourth of July holiday, offering hope to some industry watchers that the recent rally could kick-start drilling activity before the end of 2016.

According to the U.S. Energy Information Administration’s monthly report released June 30, natural gas production in Arkansas fell 1.8% in April to 2.35 million cubic feet per day (MMcf/d). That is down 19.5% from net natural gas production of 2.92 MMcf/d a year ago when the EIA added Arkansas and nine other states to its monthly reporting of natural gas production in the U.S. and the Gulf of Mexico.

Arkansas is now the eleventh-largest natural gas producing state in the U.S., well below New Mexico in the 10th spot with monthly production of 3.55 MMcf. Nationwide, monthly natural gas production in the U.S. is down 1.8% to 89.5 MMcf/d, compared to net production of 91.2 MMcf/d a year ago.

Arkansas became the nation’s 7th-largest market natural gas producer in 2010, joining such energy-producing states as Texas, Wyoming, Oklahoma and Louisiana with over a trillion cubic feet (Tcf) of annual natural gas production.

Between 2004-2008, as Fayetteville Shale drilling and development peaked, Arkansas’ annual production of marketed natural gas jumped nearly 140% from 187 billion cubic feet (Bcf) to 446.5 Bcf. Then in 2009, Arkansas first joined the list of the nation’s top marketed natural gas producers when sales of Arkansas natural gas spiked 53% to 683 Bcf of production.

Arkansas could still make the top ten list in annual production, but there would have to be a dramatic spike in output for the remainder of 2016. Yet, the recent lower production is also confirmed by the declining number of rigs in the U.S. drilling for natural gas, even as the overall U.S. rig count rose by 10 over the last week. According to the Baker Hughes, the weekly U.S. rig count surprisingly jumped by 10 to 431, with oil rigs up 11 to 341, gas rigs down 1 to 89, and miscellaneous rigs unchanged at 1.

Still, Arkansas ended the first half of 2016 without having one drilling rig in operation. There has been no drilling activity in Arkansas since the week before Christmas, Baker Hughes data shows. Overall, the U.S. rig count is down 431 rigs from last year’s count of 862, with oil rigs down 299, gas rigs down 130, and miscellaneous rigs down 2.

And despite the continuing decline in production and drilling, there has been a recent uptick in natural gas prices as utility and power generators continue to switch to the cleaner-burning energy source for electricity use from coal and other fossil fuels.

On Friday, natural gas for August delivery settled up 6.3 cents, or 2.2%, at $2.987 per million British thermal units. That is the highest futures prices since May 2014 and the fifth straight week that natural gas prices have increased. BHP Billiton, the second-largest driller in the Fayetteville Shale, has said in the past that $3 represent the breakeven point for making a profit on the production of natural gas.

The pre-Independence Day price is a marked improvement from just a few months ago when natural gas prices at Henry Hub fell to $1.49 per MMBtu on March 4. Since then NYMEX gas prices nearly doubled in price, gaining more than 30% in the month of June.

Meanwhile, the exposure to oil and gas prices is affecting two Arkansas-based companies in different ways. Fitch Ratings recently downgraded its outlook for El Dorado-based Murphy Oil Corp. to “negative” from “stable.” The rating downgrade came one day after Murphy sold off its Canadian syncrude business for

“The negative outlook reflects Fitch’s concerns about longer term liquidity and the possibility that the company may have to accept accommodative bank and capital market terms in order to preserve its financial flexibility,” wrote Fitch analyst Dino Kritikos. “Fitch believes heightened liquidity risks have resulted from the company’s revolver going current (as of June 14) and from bank syndicates’ reduced willingness to manage their oil and gas exposure in the current down cycle.”

Added Kritikos, citing Murphy’s $3.2 billion in debt: “The outlook also reflects a loss of operational momentum and potential for further asset sales, concerns that could continue to result in reduced size and scale under a lower-for-longer scenario.”

Fitch said Murphy could improve its negative outlook by renewing a credit facility, improving cash flow, and establishing “a credit-conscious plan to address production declines and loss of operational momentum.” The Fitch downgrade came a day after Murphy sold is Canadian syncrude business for $746 million.

On the other hand, Fitch offered a much better assessment of Fayetteville Shale leader Southwestern Energy Co., which on June 29 announced a public stock offering, a new secured term loan and other measures to shore up the company’s balance sheet with a new $743 secured credit line.

“The positive outlook reflects the company’s improved liquidity position and reduced repayment/refinance risk following the recently completed bank and announced equity offering/debt tender transactions, as well as the pending West Virginia acreage sale,” wrote Kritikos. “This helps moderate Fitch’s previous concern that there was heightened capital structure event risk. While execution risk remains, Fitch believes the recent transactions will help to alleviate financial and, potentially, operational constraints leading to an improved credit profile.” The Fitch analyst also said noted that natural gas prices provide an opportunity for Southwestern to “layer in hedges” to further mitigate cash flow risk and support at least a modest level of development funding.

“Fitch would likely upgrade Southwestern following execution of the equity and debt tender transactions, as well as communication of a clear plan to manage liquidity and re-establish operational momentum,” Kritikos wrote.

In week-opening session on the New York Stock Exchange, Murphy’s shares were down 5.8%, or $1.90 at $30.76. Southwestern shares also plunged more than 10% to $11.59 in morning trading on Tuesday after rising to an eight-month high ahead of the Fourth of July holiday.

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