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Permalink Reply by John Denison on January 7, 2021 at 9:58

This is one of several bullish HA assessments I've seen published in recent days. This, while the Marcellus is producing little more than the sound of crickets for new exploration, and our closer neighbors Eagle Ford and Permian Basin continue to slump. While I don't wish ill on those who make their living from O&G in those regions, I commend the Haynesville drillers and operators for continuing to plug away and employ evolving technology to maximize returns in the face of sub-$3 gas. 

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Permalink Reply by Skip Peel - Mineral Consultant on January 7, 2021 at 10:06

Less associated gas from the Permian, increasing LNG demand on the Gulf Coast and something just short of $1/mcf in greater transportation costs for the Marcellus equal better economics for the Haynesville Shale basin.  As long as the price of crude stays well below $50/barrel, the Haynesville will be the beneficiary.

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Permalink Reply by Skip Peel - Mineral Consultant on January 7, 2021 at 11:50

Disinterest In Appalachia Could Mean The Rise Of Haynesville Shale

Jan. 07, 2021 seekingalpha.com  Written by Michael Boyd

Summary

• Permit issuance in the Marcellus shale has naturally tanked alongside driller curtailments.

• 2021 budgets have not been officially released for the entire sector but odds are high for a year-over-year decline in Appalachian gas production.
• Meanwhile, Haynesville activity has been robust once coronavirus impacts are considered.
• This idea was discussed in more depth with members of my private investing community, Energy Income Authority. Get started today »

Appalachia, without question, is the current king of dry gas production. The incredible rise in volumes from the Marcellus and Utica shale fundamentally changed the energy landscape in the United States permanently. For context, more than 40% of domestic natural gas production is sourced there, a percentage that has grown without fail, year after year, since horizontal drilling began in earnest.

That has often led to some interesting questions, including where benchmark natural gas should be priced. Today, that continues to be via the Henry Hub in Louisiana. Does that small area in Louisiana deserve to be the de-facto benchmark price nationwide, particularly as the area is losing relevance? No doubt that at least for the Eastern United States, Henry Hub has little relevance compared to more local hubs. Perhaps there needs to be change.

Quirks Of Market Hubs, Permitting Activity

Not so fast. For a multitude of reasons such as its proximity to nearly all current liquefied natural gas ("LNG") export terminals and core industrial / commercial consumers along the Gulf Coast, Henry Hub has proven to be the more stable demand center. In-basin pricing issues, something I talked about in depth recently in its own focus article ("Appalachian Producers: Henry Hub Pricing Matters Less Than You Think") has led to wide differentials and poor spot pricing in local Northeastern markets. With most Northeastern natural gas volumes being used in the production of electricity and for heating, the current warm winter has led to a lot instability.

So much so that production curtailments have been a major thing, something nearly all Appalachian producers (Range Resources (RRC), Antero Resources (AR), EQT Corporation (EQT), Cabot Oil & Gas (COG)) have participated in to some degree. With wells being shut in, it's also no surprise that permitting activity has tanked - which actually might be an understatement. Monthly permit issuance fell to levels not seen in more than a decade. After all, why would a producer file for permits to drill new wells if those very same producers are considering cutting existing volumes? While there's a healthy backlog of drilled but uncompleted ("DUC") wells to work through, this will have to change soon. Even the advances in technology which have boosted estimated ultimate recoveries ("EURs") cannot offset this.

Haynesville shale, located nearby to Henry Hub, has seen much more steady permitting interest. Better local demand, plus the benefit of a little less deluge of associated gas production from the major basins in Texas, has really helped boost the prospects for Haynesville shale in 2021. While there's little chance of Haynesville overtaking production from its Appalachian competitor - current production is one third the rate - it could very well be the more stable basin in the coming years, perhaps even returning to incremental growth.

Many investors likely have not explored investment in this region. Unfortunately, most operators in the region are private equity backed companies or just straight-up private operations. Of the 43 rigs operable in Haynesville, just nine of those were operated by public companies. Comstock Resources (CRK) controls seven, with bankrupt Chesapeake Energy (OTCPK:CHKAQ) and small-cap Goodrich Petroleum (GDP) holding one each. That really makes Comstock Resources the only true option available to leverage that thesis. I've been surprised at how poorly the stock price has performed lately, especially in light of its advantaged access to better sales markets. That might soon change.

Takeaways

How this data impacts your thinking likely depends on your existing views. Bulls will say that weak permit issuance is a sign that these producers are going to be prudent users of scarce capital, instead prioritizing free cash flow to balance sheet cleanup and perhaps even equity returns (buybacks, dividends). Bears will say that low activity means that many of the problems Appalachia has been facing, such as takeaway capacity constraints or stretched storage, are not going to go away. For those who are a bit tired of that tug of war, shifting an investment to Haynesville shale might result in a little less frustration.

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