Feb 13, 2023
On February 10, The Capitol Forum’s Teddy Downey and Daniel Sherwood sat down to discuss the most pertinent issues impacting energy markets and policy last week. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Thanks to everyone for joining us today. I’m Teddy Downey, Executive Editor here at The Capitol Forum. And I’ll be speaking with Daniel Sherwood, who heads up our energy coverage. And just a quick reminder, if you have questions for us, email them to editorial@thecapitolforum.com. And Daniel, thanks so much for doing this. It’s a lovely Friday here in D.C.
DANIEL SHERWOOD: Yeah, I heard it’s sunny and windy. Thanks for having me. I’m excited. We’ve got a good call today.
TEDDY DOWNEY: Yeah, so let’s dive right in. This week you did a great piece on EQT’s acquisition of Tug Hill, where you looked at how EQT’s business plan for Tug Hill differed from Tug Hill’s previous plans prior to the acquisition. Can you walk us through what you found?
DANIEL SHERWOOD: Yeah, absolutely. And then I’d love to hear your reaction and some of how you’re synthesizing our findings. I’ve got to give a hat tip to Sharon Kelly. She couldn’t join us today, but I just wanted to give her credit. She fronted this investigation.
So, I mean this deal has been an interesting one for us. When it first was announced, the general sentiment in the industry was there’s no competition issue here at all. Why are you even asking? And as we continue to look deeper, there continues to be things that seem to be of interest.
As we reported in the past, there’s the issue with the board seat and possible issues with NGL production. Here we’re looking at—we were tipped off by that clause on the slide that you and I discussed, Teddy, in December about basically the firm transportation capacity that EQT has. And what that means is the types of pipelines where they can take the natural gas out of the basin to places, to markets, outside of Appalachia where they get more money for their product. So that’s obviously well sought after. The Appalachian Basin is famous for its constraints on that type of capacity, that kind of take away capacity.
And so here molecules that are produced in that basin will impact how you can sell and who you’re competing with to sell those molecules in non-local markets as well as local markets. And so what we did here with Tug Hill is we were just kind of scratching our heads and looking at it. And sure enough, we saw this kind of strong production growth that contrasted with some of the producers in the Appalachian Basin. Last April, for instance, we did a whole analysis that took the ten largest producers in the basin and looked at what their past production, current production and forecast production was. And now it’s no secret that, for the most part, these producers maintained their production output. While that was happening, competitors like Tug Hill were increasing it.
Tug Hill is a private player. So the types of forecasts and production disclosures are scant compared to our public operators that we talk about much more often. This is one of those times where using Upstream can be a really huge benefit for us because we have that real time data from the states that all producers report.
So using our Upstream database and comparing it with some public statements from Quantum about Tug Hill’s plans, we saw that they wanted to double production by 2025. And then comparing that to what EQT was forecasting in its announcement, they were going to reduce their production by a third compared to full year 2021 levels. We only have Q1 through Q3 from West Virginia in 2022. They’re above 900 Mcfe. And so let’s just say that even though they kept it flat last year—which we can’t say that yet—but Tug Hill would still be at around 1,200. So EQT is forecasting 900 compared to 1200. In one year, that’s a big deal. But it’s not huge. Meaning, it’s not going to completely move the market. What is more concerning, I think, is looking at it year over year more long term. And then that does start to have a bit more of an impact.
And then our last finding, and our last kind of component of the story, we’re just saying, hey, this looks like it might be a theme for EQT. Because they did the same thing with Alta, a separate privately owned entity that was similarly kind of bucking that trend, increasing production. And then once it becomes under the umbrella of EQT, they dampen the—EQT post‑acquisition—kind of flattened that Alta production profile.
And just in conclusion, I mean, this is not shocking, right? Private equity backed operators are known for infusing a lot of capital and trying to be attractive to a buyer and getting out. And that they were struggling to do that for a brief period of time. And it’s no coincidence that Quantum, on the public record, is bragging about the fact that they are a maverick producer and that they are different than others. Because I’m sure there’s a little bit of savvy there because a competitor like EQT might hear that, and that’s going to put that producer on their radar in a way that they wouldn’t have been there before.
So that’s what we found. And, yeah, Teddy, with competition issues as one of your areas of expertise and your forte, I’d love to hear what your reaction is to those findings and what we found here.
TEDDY DOWNEY: Yeah, I mean, it’s obviously definitely one more thing for the FTC to look into, right? I thought that was really interesting, the different incentives for the different types of companies. Like these smaller players in Appalachia actually don’t mind certainly being a private equity owner, but just generally, the smaller players don’t mind the lower price. They just keep selling. They just sell more gas. They’re just like I’m just going to sell more. They’re not worried. They’re not sort of playing this bigger game of like, well, could I coordinate enough supply reduction to affect the price? They’re just like, look, I’m just going to produce this and sell it and like, that’s my business.
And then you get to these bigger players and then all of a sudden they’re like, huh. Let’s just start cutting production and maybe we’ll get a better price. It becomes like a reasonable possibility that you could sort of have disciplined prices across the state, or in the region.
And I thought it was interesting Chesapeake was—I guess it was after the acquisition when the executives said, hey, we need to cut production here. That’s interesting just to think about, just like, all right. Well, this acquisition happens then he says that. It’s like, again, is there a possible ability to actually kind of get everyone to be more disciplined? Which has its own antitrust implications. And then you have the President coming out and scolding oil and gas companies for not producing.
I think the other thing that’s interesting is just like I think the FTC, back in the day, might not really get into the weeds on the differences in these types of companies and their incentives and how they behave. But in this more recent, more aggressive, era, I think there’s going to be a lot more attention paid to, well, what was this company doing? What is the incentive? How were they behaving? I mean, it’s not unusual to sort of call someone a maverick or sort of identify someone as a maverick. But in this case, it’s not just that they’re a maverick. It’s also that there’s just like this history of these smaller players, as you point out in the article, their business model is a little bit different. They’re just happy to be aggressive on the production side.
DANIEL SHERWOOD: Yeah, and in the past, I mean, when we’ve talked about this before, my answer has kind of been, well, Tug Hill is so small, it’s not going to make a difference compared to EQT or compared to Chesapeake. It’s like it’s not going to give you that kind of control over the whole market. But kind of how my understanding has evolved, especially as I think entities like EQT have grown more entrenched and more dominant, is that it’s not so much of like taking two percent of Appalachian production offline for that next year. It’s more about its long-term planning. It’s more about knowing exactly how many molecules they can send to the Gulf to earn a premium compared to Dom South. That’s the hub that most of Marcellus Utica gas is based off of. And so they’re really tuned into those differentials as a result of take away constraints and just due to the nature of the basin.
And, I mean, as far as getting into the weeds, I think something that is interesting here is that we did this from a public facing analysis for the most part. We interviewed with experts and such. But we don’t have access to the specific agreements between EQT and Tug Hill that already exist based on their plans moving forward. And I think that would be kind of where I would want to look and see, okay, how are you plotting out this production? How are you plotting out this firm takeaway capacity based on the acreage and based on your pipeline agreements? And see and see what’s really going on there.
TEDDY DOWNEY: Yeah, and the other point here is that, look, we’ve got private equity involved. They’ve got the board seat issue already. It’s still sort of in there in the agreement. And you point out, is this like a strategy to roll up all of these smaller players and cut the production? Is that the plan there? I mean, it’s not inconceivable that that could be a business strategy, as you point out, just given the constraints on sort of getting it into a broader market.
The other thing I think is interesting is like let’s say down the road—I guess this is a long way away. But it’s interesting to think like when Mountain Valley Pipeline actually ultimately ever happens. How do these pipelines change the incentives once they actually end up getting built? It’s kind of another interesting thing to think about.
DANIEL SHERWOOD: And hugely. I mean, it’s crazy how much of an impact that that has.
TEDDY DOWNEY: Because if they’re still limiting that, I mean, ostensibly they’ll have less incentive to limit the production. But like then it becomes like you still don’t want companies to have too much control because that becomes a price for everybody. That starts to factor into the price for everybody. Because the region will be so important. Like right now, it’s like, okay, the regional cost. But regionally, the prices are lower. But what’s going to the control over prices when you get out of there, I don’t know when you have pipelines? It’s just an interesting variable.
DANIEL SHERWOOD: Yeah, absolutely.
TEDDY DOWNEY: Again, awesome piece. Let’s move onto, we had a few more earnings calls the past week. More natural gas focused producers providing some operational updates. What stuck out to you in the recent numbers and updates?
DANIEL SHERWOOD: We’ll take National Fuel Gas first and then briefly just touch on Range. Range just gave a few little pre‑earnings statement releases. Whereas, NFG did its whole release, National Fuel Gas has a different fiscal calendar. So actually, they’re unique because not only do they report relatively early in the reporting season, but they report about their Q4 and a little bit of 2023 operational insight that we wouldn’t have otherwise.
So, yeah, this is a good schematic tie-in to kind of the different business models that are in the E&P space, which as we talk about ad nauseum, they’re so regularly just grouped in as one homogenous type of company when there’s actually so much variation. So National Fuel Gas is unique for a few reasons. Chiefly among them is that they’re vertically integrated. So they have the upstream producing assets as well as midstream assets, but then they also have a utility business. So that makes them pretty unique. Seneca Resources is the name of their E&P unit.
So they are included in large volume producer peer group, but they have smaller volumes compared to the majors like EQT, Chesapeake and Southwestern in the peer group. And similar to our kind of smaller volume producers in the peer group, they’ve been ramping production. They are unique in that sense. And they’ve been able to pull off the numbers that they forecast in a way that was better than most of their peers. And they’ve done a good job from an operational perspective, in my opinion, of increasing well efficiencies and then boosting that production. And that’s reflected in Upstream.
We have an index that gets generated every month that aggregates all of the data of the major publicly traded entities and compares them on a composite score. And so I can go in here and I’m like looking right now at National Fuel Gas’ well efficiency, for instance, and it’s on a steady linear rise, as they continue to bring more wells online and continue to increase production. And so that mantra led to very positive results for their business.
And I don’t know, Teddy, it was kind of interesting for me reading their earnings call, and there’s just this new tone in the field of a little bit more stability than, at least I feel, I’m used to, despite this huge comedown in natural gas prices. And, I mean, they had to revise their forecast because of it, of course. But despite that, still had a pretty legitimate forecast.
So that was kind of my overall take. To answer the question on how well the company is positioned: from what I am seeing, in the coming year, I think it will do quite well. It seems to be sustainable. And I see nothing in the underlying data that we get that would demonstrate a hiccup. They have their two rigs deployed and they have contiguous acreage. They’re a conservative player and they keep things neat. They divested their operations—they had kind of a random footprint in California and they divested it last year. And the increased focus on the Appalachian Basin last year was a big year where you saw operators either choosing we’re going to get devoted pure play on the Marcellus/Utica, or we’re going to go out and add some other operations as a supplement to our portfolio, like Southwestern which expanded its footprint and Chesapeake which refined its focus on natural gas, for instance. And here in National Fuel Gas’ case, focusing in on their acreage in the eastern U.S. is paying off for them so far. I can roll right here into Range Resources.
TEDDY DOWNEY: I have myself on mute. I was just about to ask about Range Resources.
DANIEL SHERWOOD: Okay. Range Resources is kind of the company that got me interested in the Marcellus/Utica in the first place. They sank famously the first well here. And I think the two things that stuck out to me on their brief little disclosures is (1) so again, getting back to this theme we are focusing on becoming a pure play or are we branching out? Range had a relatively expensive splash into the Haynesville Basin, which is in Louisiana, natural gas dominant basin, quite a few years ago. It ended up divesting it. It took a huge write down. It was a major loss for the company. But they no longer have that acreage and they are now fully focused in the Marcellus/Utica. Because of natural gas prices, they got contingency payments from that Haynesville divestiture last year. So pat on the back for that for them.
So they’re kind of known to focus on what’s called wet gas. So that’s NGL streams. But at the end of 2021, I believe, they discussed a shift about a focus to expansion into dry gas, the dry gas window in northeastern Pennsylvania. And again, they added to their reserves. Their production forecasts, while not the type of growth that we saw from like say Tug Hill or National Fuel as far as a percentage increase isn’t the same, they still had positive production results. They didn’t seem to be incredibly impacted by the 4Q freeze offs.
So yeah, I’d say that Range’s pivot seems to be well‑timed. Because last year, everyone—the narrative was that Haynesville is where you need to be and that’s just the best place in the world. And all you losers who are only focused in the Marcellus/Utica are really missing out. And we’re starting to see, as happens in this cyclical industry, that tide turn a little bit.
Just yesterday, a story came out that we see IRR is declining by double digits, also the Marcellus and Utica dry gas windows as well, but also in Haynesville. And again, you have really favorable economics and aspects of the wet gas locations in Marcellus. I think that’s why Range kind of sticks out to me is because they seem to be navigating those different opportunities relatively well – still producing strong wet gas streams while adding on some dry gas development as well.
So, yeah. And again, I think just today Reuters came out—pardon me, Enverus came out with a report about how we might be running against some serious storage issues if Haynesville activity right now doesn’t decelerate. So things might be changing and it does seem to me like there’s more of kind of an understanding about keeping a cap on aspects of production output in the Marcellus/Utica compared to kind of a more competitive basin, their competing basin in the Haynesville. So that’s what I have on Range.
TEDDY DOWNEY: Awesome. So let’s move over to Mountain Valley Pipeline, which we talk about every week. The Forest Service granted an extension of the comment period for the pipeline’s Supplemental Environmental Impact Statement and RGC Resources issued a rather gloomy outlook for 2023 completion. Should we be expecting an amendment to the timeline from Equitrans this month?
DANIEL SHERWOOD: Yeah, talk about a leading question. Can you tell that I think the answer is yes? And, Teddy, if we were more opportunistic, I think I would be pitching you a story. It’s getting more bleak, as I said about RGC.
So a little tip for anybody who wants to follow these guys as closely as we do. This is something I like to do generally, is search for disclosures in smaller joint ventures or large customers/offtakers. So RGC is a small partner in the joint venture that’s behind Mountain Valley Pipeline. And so what we focus on is the operator and majority stakeholder Equitrans. But RGC is a small gas transmission and utility business in Roanoke, and they’re interested in the pipeline getting built, right? Because they want those molecules, those cheap molecules, from the Marcellus/Utica down South in the mid-Atlantic area, but they’ve been along for the ride, this years-long ride, and billion dollar outruns.
And so they have to update their investors, of course, about what that underlying delay, what a possible delay, is going to look like. And they’re quite—they’re pretty sensitive to it. And in instances like this, when they’re reporting before Equitrans, you can kind of get a little bit of a leg up in seeing what’s going on moment‑to‑moment for the companies.
And so I just highlighted some text from their most recent filings that came out this week. I mean, they go on and on and on about the different delays and the different permits and the different challenges that have led to the separate delays and what they’re looking at. And then I highlighted this language here. “However, while as of the date of the filing of this quarterly report, the LLC is cognizant that attempts to enact such legislation” – so Teddy, this is referring to that legislation that you and I keep talking about, about can Congress get permitting reform across the finish line that will allow this pipeline to move forward? Our sentiment has been no. And then drilling deeper, in the event that it’s going to help them complete the pipeline by their expected date of this year, we say definitely no. Here we’re hearing the company, RGC Resources, saying that “such attempts to enact legislation have failed. And that differences between and within the Republican and Democratic parties continue to exist as to the scope and terms of any such reform. Such differences could impede the prospect of legislation being enacted in sufficient time for the LLC to complete construction in 2023”.
This didn’t get any coverage, which I’m surprised about. So I wanted to highlight that language because it seems material to me. And that’s all but a confession, is it not, that they don’t think it’s going to happen? I mean, the language literally is like we’ve got all these issues, which is why we are focusing on legislation. And then they’re like, I don’t think the legislation’s going to get done.
TEDDY DOWNEY: Yeah. Well, even if it gets done, it still has that issue of is it going to clear up everything so that MVP can actually be sort of expeditiously completed? Yeah. Well, more evidence that there’s going to be another delay there. And just for everyone on the call, if you haven’t been on each of these calls recently, we’ve been pretty bearish that there would be any ability to come up with a compromise that really, again, allowed MVP to get legislative compromise that would actually address all the problems that they’re running into.
DANIEL SHERWOOD: Just really quickly on that point, because this is directly related to our Tug Hill/EQT investigation. EQT is very—I mean Equitrans is a spinoff of EQT. Like they’re in close contact for all sorts of reasons. I mean, they’ve obviously had disputes over this as well. It’s not all brotherly love per se. But if Mountain Valley Pipeline—every time that this gets delayed, that has major implications for every operator in the region and their drilling programs. And if you have a relatively small producer continuing to increase their production output, thus making them less small, and the limited amount of takeaway capacity that you have remains limited, it makes those types of moves that much more important. I just wanted to just kind of bring that back with our first point about this aspect of the deal.
TEDDY DOWNEY: Yeah, Mountain Valley Pipeline is taking so long definitely puts all of these companies in a bit of a holding pattern in some respects.
DANIEL SHERWOOD: That’s right.
TEDDY DOWNEY: Sort of the strategic activity at least. And then let’s talk a little bit, as we always do, about natural gas prices. What’s your read in that area this week?
DANIEL SHERWOOD: Totally. And just for anybody on the call who has any questions, feel free to fire them off to us at editorial@thecapitolforum.com. Rounding off the price question and can get everybody back on their way on this Friday.
But so here we are, Teddy. I mean, I have liked watching these prices with you. And I remain bullish long-term about the prospect of natural gas. But this new move down has been sustained. Like we’re still trading—let me see, where are we? $2.46, $2.43. Yeah, those are more in line with historic prices. That’s kind of where it traded for quite some period of time is what I mean. You know, National Fuel Gas, when asked on their earnings call, when asked about any acquisitions, they said with this volatility, no way. They’re not even seeing any deals. Like it’s the same thing that all the companies were saying five months ago, but then it was about volatility on the way up. So now we’ve got that volatility and that has led us back down, but has so far sustained in a place where natural gas is more accustomed to recent history.
I brought up the European weather conditions/wind and how that obviously leads to renewable generation, which would decrease demand on gas consumption, for instance. So that’s bearish news. Separately, there’s really bullish news out of the U.S. South Central region. I mean, Natural Gas Intelligence described it as “massive” storage withdrawals. And that didn’t do anything. It didn’t move the price.
And so what does that say? It says that there’s a lot of gas. And I know people who are looking at the two year, three year out prices and those are falling so much. And they’re saying, oh, this is really getting bearish. This is really getting concerning.
So that’s where we’re at. That’s what it says about macro sentiment is people are really kind of shifting focus on a surplus of gas, at least in the near term. I think it’s important to remind everyone that winter’s not done and that exogenous events can throw all this stuff on its head. What if another LNG facility goes out, for instance? And as you highlighted, Teddy, which I think is sage, there’s major pending policy issues and foreign diplomacy and just human crises issues on the ground in Ukraine.
TEDDY DOWNEY: I’m amazed. I’d say I am amazed at how little it feels like the geopolitical issue around gas and Russia is sort of affecting people. I mean, I imagine it’s probably because the LNG market is not—it’s still regional. The LNG market is not robust enough to sort of create this like global crisis. So you sort of have these regional pockets still.
DANIEL SHERWOOD: Oh, yeah. Even domestically. Even domestically. Look at Northeastern U.S. or in California when Newsom’s calling for an investigation into gas companies down there because the prices are so high. So it is not like—and that’s not even LNG. I mean, I’m not implying that we don’t have a global natural gas market. We obviously do. But despite that, as is the case in any supply chain, but still, you have very interesting and unique isolated regional issues.
But I couldn’t agree more that the—I mean, I don’t know if it was all the hype or I don’t know if it’s because of how quickly the European countries mobilized floating liquefied natural gas facilities or a combination of all the above, but it does seem that there was a lot of scramble and a lot of fear going into the winter, especially given the increased demands from Europe. And that’s kind of gone away. I mean, now the new headline is will China take LNG molecules from Europe now that they’re reopening, right?
TEDDY DOWNEY: Yeah, yeah.
DANIEL SHERWOOD: It’s like, okay. So again, we’re returning to normal, like that was the normal. And so, that’s kind of what makes me—it does make more sense rationally that we’re trading at a place from futures perspective that’s a little bit more in line with that normal. So I don’t know, you know.
TEDDY DOWNEY: There’s still a war. There’s still a war going on. It’s just that it seems a little bit—it’s interesting. Because, all right, it’s warmer weather. But there’s still this huge geopolitical uncertainty.
DANIEL SHERWOOD: Right.
TEDDY DOWNEY: But anyway, I think that’s a good way to—I don’t see any questions. Let’s check real quickly. No, I don’t see any questions. But as always, great talking with you, Daniel. And we’ll let everyone get back to their Friday.
DANIEL SHERWOOD: Awesome. Thank you, Teddy. See you.
TEDDY DOWNEY: All right. Thanks, everyone, for joining the call today. And this concludes the call.
