ANALYSIS: Strong Henry Hub futures push rates of returns higher in dry gas plays

Highlights

Haynesville rig count reaches multiyear high

Marcellus IRRs surpass 30%

• 02 Aug 2021 spglobal.com

The Henry Hub average 12-month forward curve jumped nearly 50 cents in July, significantly increasing returns in US dry gas basins as the active rig count in the Haynesville reaches a multiyear high.

The US dry gas basins improved in July as the average 12-month forward curve for Henry Hub settled at $3.62/MMBtu, an increase of 46 cents. The increase in natural gas prices lifted all of the major dry gas basins, with internal rates of returns in the Haynesville climbing to 29%, according to S&P Global Platts Analytics.

In the Marcellus, IRRs are 31% in the wet window and 22% in the dry play. Utica IRRs improved this month as well to 26% in the wet and 28% in the dry. Given the relatively high prices of oil and gas this month, both the wet and dry portions of gas basins boast robust returns.

Platts Analytics IRRs are based on a half-cycle, after-federal corporate tax analysis, which excludes sunk costs such as acreage acquisition, seismic expenses and appraisal drilling. Returns above 25% typically incentivize increased drilling and completion activity.

Haynesville rig counts continued to increase for the week ended July 28, adding one rig to bring the total to 56, according to data by Enverus. Rig levels now sit at their highest since October 2019 for the core acreage of the basin. Expanding further to the non-core areas of the Haynesville, which include the non-Haynesville in Arkansas and Louisiana and East Texas non-Haynesville producing regions, total rigs pushed to 60 for the second time this year, tied for the highest level since November 2019.

Haynesville production has steadily ticked higher during the second half of July as modeled production has averaged 12.9 Bcf/d since July 14, 150 MMcf/d stronger than the previous two weeks, according to Platts Analytics. The growth is forecast to continue in August with Haynesville production expected to average 13.2 Bcf/d, more than 300 MMcf/d above the July average.

Rigs in the core Haynesville will need to remain above 55 for the majority of the year in order to incentive the current production growth in Platts Analytics' forecast, reaching 13.9 Bcf/d by the end of the 2021 and 14.8 Bcf/d by the end of 2022.

The average 12-month forward curve for the US domestic crude price benchmark, WTI, did not follow natural gas prices higher. It declined by $2.58 to $66.78/b in July. The decrease in oil prices caused returns within oil basins to fall by a couple percentage points. However, the Permian Delaware, Bakken, Eagle Ford and Permian Midland all still remained at or above 35% IRR.

With prices holding relatively consistent for another month, it is expected drilling and completion activity will likely continue to climb in those basins, led by private operator activity. It remains clear public exploration and production companies are holding to their strategy to maintain capital discipline and working to pay down debt and returning value to shareholders.

While rigs have steadily been increasing this year throughout most of the major basins, the Permian has seen a surprisingly slow recovery. When compared with pre-coronavirus levels, it remains down by roughly 40%. One potential explanation for the slower-than-expected recovery may be that many of the larger publicly traded exploration and production companies in the US have the bulk of their acreage in the Permian. Those companies have adhered to rigid capital discipline and have brought back fewer rigs than small and private operators.