While there continues to be pressure on domestic natural gas demand due to the COVID19 shutdowns, consumption for power generation has remained steady and is up 4% in 1H20 versus 1H19. Using Genscape data, estimated YTD natural gas consumption for power generation has averaged 28.5Bcfpd vs. 27.4Bcfpd in 2019 and 2Q20 averaged 28.3Bcfpd, in line with 2Q19, and above our 2Q20 estimate of 27.2Bcfpd. This y-o-y increase comes despite a 2% decline in overall power generation output (see Steve Fleishman’s Power Tracker), with COVID-19 and milder weather negatively impacting natural gas burn while weaker Henry Hub prices likely drove increased coal to gas switching. Regarding coal in power generation, Genscape has 2020 YTD coal power burn down 32% vs. 1H19 levels. In our supply/demand model, we estimate power consumption to average 31.1Bcfpd in 2020 (+0.2Bcfpd y-o-y), increasing to 32Bcfpd/32.6Bcfpd in 2021/222 with annual increases of +0.3Bcfpd in beyond 2023 as renewables gain market share. See page 3 for the power consumption data.
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Weekly Energy JAM highlighting thoughts and themes for 2Q earnings season including 2020/2021 outlooks, balance sheets and long term growth plans
One of the key takeaways from our recent fireside chats with SWN and EQT is that Appalachia Basin consolidation should happen. As EQT noted, 50+ operators running 38 rigs in the basin doesn’t make sense. We agree and see the consolidation trend gaining traction 12-18 months out as producers look to improve financial positions via assets divestures and rising natural gas prices support valuations.
After quickly exploding to 23% following the early-March OPEC meeting, the HY Energy credit spread has round tripped to settle around 10% over the past two weeks. However, a lot has changed over this period and after another full look at credit pricing across the sector, we have four key takeaways: 1) With both credit spreads and the XOP 60-65% off mid-March lows, risk/reward isn’t skewed entirely in one direction. 2) Credit & equity risk hasn’t uniformly improved, setting up ripe relative value opportunities across equities and cap structures. 3) The window for some producers to refinance 2021/22 maturities at attractive rates is open, which could help push back maturity risk.
With WTI stuck at $40 and rising COVID cases creating market headwinds, the sector recovery has stalled over the past month. However, through all the choppiness, we continue to look for relative value opportunities, and inside this week, we look at YTD company performance from a different angle - how has Enterprise Value changed this year. While we typically look at stock performance to determine out/underperformance vs. our Index, how Enterprise Values have changed could also shed light on some opportunities and perceived market risk. Directionally, some change in EV performance makes sense with the natural gas producers still at the top and HES right behind them, but there are a few standouts, like OXY being the #2 Large Cap performer at -20%, while EOG and CXO are towards the bottom of the list, down 41%. See the performance chart inside, along with some thoughts on the OXY warrant and HY issuances on Friday.
While the tug-o-war between weak summer 2020 prices and a bullish 2021 outlook continues, two recent data points are worth watching to see how supply/demand trends in 2H20. On the demand side, the biggest wildcard remains LNG exports and the impact of cargo cancellations on volumes. After seeing 20-30 cargos cancelled for June, recent reports suggest July may be the peak month for cargo cancellations at 35-45, before declining to 25-45 for August. The impact of the July cancellations has reduced LNG export demand down to 3.5-4.5Bcfpd, so this may be where volumes bottom over the next 4-6 weeks before rebounding. On the supply side, while the Marcellus rig count continues to move lower (27 per Baker Hughes Rig Count), we’ve seen the Haynesville rig count stabilize in the 32-33 range over the past two months, potentially in anticipation of strengthening 2021 natural gas prices. The Haynesville is still down 20 rigs y-o-y, so supply growth will be challenged, but we’d view any activity increase as negative for price.
With the virtual conference circle winding down and 2Q earnings season thoughts now rolling in, we thought about a few themes that could start factoring into stock performance in the back half of the year. One of them is politics and how the Presidential election could impact the Energy sector. We provide some updated views around this theme and other thoughts from the past week inside.
Today we held a fireside chat with Toby Rice (CEO), David Khani (CFO), and Andrew Breese (IR). Beyond our initial takeaway that Toby so far wins the home office set up with a room made for podcasting, once we got going, our conversation honed in on EQT’s debt reduction focus, shut-in volumes, the current M&A environment, and a new opportunity to potentially offload firm transport capacity on MVP. We left on a positive note and continue to view EQT as a top pick, well positioned to capture rising 2021 natural gas prices.
Wolfe Research's Senior E&P Analyst, Josh Silverstein, hosted a fireside chat with EQT CEO, Toby Rice, and CFO, David Khani.
With ethane and propane prices rising well off recent lows, last week we had the chance to speak with Ben Stanton (Director of Energy Commodities & Market Analysis) and Alan Engberg (VP of Liquids Marketing) at RRC, along with the IR Team. As a domestic top 10 producer of natural gas and top 5 producer of NGLs, RRC has a unique insight into the global supply/demand drivers for both commodities and the dynamics of the different parts of the NGL basket. We had three key takeaways from our conversation: 1) FCF generation and balance sheet repair remain higher priorities than growth, providing further evidence, in our view, that Appalachia supply won’t respond unless price sustainably reaches $3/mmbtu. 2) The recent rise in ethane/propane pricing has been driven more by demand remaining strong rather than declining supply. 3) Rising natural gas prices should help pull up ethane pricing next year due to increasing supply pull from Appalachia as Permian/Associated volumes decline. We provide updated NGL charts inside.
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