Pipeline capacity to help drive gas deals: WoodMac
Houston, 3 October (Argus) — Natural gas producers in the US northeast are likely to seek merger and acquisition (M&A) deals that include pipeline access to favorable markets amid expectations that prices will remain capped near $3/1,000 cf into the next decade, consultancy Wood Mackenzie said.
Although natural gas infrastructure is not always a primary driver of M&A activity in the Marcellus and Utica shales, it is expected to remain a factor as producers chase more attractive Gulf coast and midcontinent pricing, Wood Mackenzie head of Upstream Oil & Gas M&A Greig Aitken said.
"Companies are looking at incremental capacity, contract capacity and where to get the best price, and if there is someone who can get them access to better prices, then they want to do that deal," he said.
The extent to which infrastructure plays a role in M&A activity will change over the next few years as pipeline capacity gets further built out in Appalachia. But it should remain an ongoing "attractive feature" for deals, he said.
The consultancy pointed to the $6.7bn Rice Energy and EQT deal earlier this year, which created the largest natural gas producer in the US, as an example of companies combining to take advantage of combined firm transportation portfolios and better access to markets in the Gulf coast and midcontinent.
Argus natural gas forward prices for 2018 show Henry Hub and Chicago Citygates holding a 73¢/mmBtu and 52¢/mmBtu premium to Tennessee Gas pipeline zone 4 Marcellus prices, respectively. The Marcellus forward price averages at just $2.29/mmBtu for 2018, with Henry Hub at $3.02/mmBtu.
Wood Mackenzie said its forecast that prices will remain near the $3/1,000 cf level past 2020 is based on high production rates, particularly from the Marcellus shale. Recent deals are likely encouraging even more production as companies that have just spent a lot of money on a deal are unlikely to choose not to develop their new acreage, Aitken said. Associated gas from more oil-focused basins is adding even more gas to the market, putting a lid on any significant price increase.
US output trended lower following a gas price collapse in March 2016 to a 17-year low of less than $1.65/mmBtu, causing 14 consecutive months of year-on-year declines. But output has since rebounded, and in June and July surpassed year-earlier levels.
Production from West Virginia and Pennsylvania, two states that sit atop the Marcellus shale, rose to 4.5 Bcf/d and 14.8 Bcf/d in July, respectively, according to the US Energy Information Administration.