RRC outlook on Nat Gas - good readWorth a read IMO
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Range Resources (NYSE:RRC)
Q1 2015 Earnings Call
April 29, 2015 9:00 am ET
Executives
Rodney L. Waller - Senior Vice President and Assistant Secretary
Jeffrey L. Ventura - Chairman, Chief Executive Officer and President
Roger S. Manny - Chief Financial Officer and Executive Vice President
Ray N. Walker - Chief Operating Officer and Executive Vice President
Chad L. Stephens - Senior Vice President of Corporate Development
Alan W. Farquharson - Senior Vice President of Reservoir Engineering and Economics
Analysts
Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division
Bob Brackett - Sanford C. Bernstein & Co., LLC., Research Division
Brian Singer - Goldman Sachs Group Inc., Research Division
David William Kistler - Simmons & Company International, Research Division
Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division
Operator
Good morning, and welcome to the Range Resources First Quarter 2015 Earnings Conference Call. This call is being recorded. [Operator Instructions] Statements contained in this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. [Operator Instructions] At this time, I would like to turn the call over to Mr. Rodney Waller, Senior Vice President of Range Resources. Please go ahead, sir.
Rodney L. Waller - Senior Vice President and Assistant Secretary
Thank you, operator. Good morning and welcome.
Range reported results for the first quarter 2015 with record production, a continuing decrease in unit cost and some outstanding well results. The order of our speakers on the call today are Jeff Ventura, Chairman, President and CEO; Roger Manny, Executive Vice President and Chief Financial Officer; and Ray Walker, Executive Vice President and Chief Operating Officer. Range did file our 10-Q with the SEC yesterday. It should be available on our website under the Investors tab, or you can access it using the SEC's EDGAR system. In addition, we posted on our website supplemental tables, which will guide you in the calculation of the non-GAAP measures of cash flow, EBITDAX, cash margins and the reconciliation of reported earnings to our adjusted non-GAAP earnings that are discussed on the call.
Now let me turn the call over to Jeff.
Jeffrey L. Ventura - Chairman, Chief Executive Officer and President
Thank you, Rodney. I'm going to begin my remarks with some macro comments about our industry and then focus specifically on Range.
Starting with the macro, as you all know, U.S. gas supply has increased ahead of demand causing low gas prices in most of the U.S. and negative basis differentials in the Appalachian basin. We believe that over the last year, the U.S. gas market typically has been oversupplied by about 2 Bcf to 4 Bcf per day. However, we see positive things that are happening on both the demand and supply sides of the equation. On the demand side, I believe that most people would agree that additional natural gas demand is coming and coming in a very meaningful way.
In our presentation on our website on Page 19, we have a projection on natural gas demand with time. The good news is that gas demand is expected to increase about 2 Bcf per day this year. This projected 2015 increase in gas demand as driven by the conversion of coal-fired power generation to gas, increased industrial demand, plant exports of gas to Mexico and LNG exports from the Gulf Coast coming online.
For 2016 through '20, natural gas demand is projected to increase by about 3 Bcf to 4 Bcf per day each and every year. It shows about 20 Bcf per day of incremental natural gas demand by 2020. There are multiple other reports that project natural gas demand with time in the report we reference as consistent with our internal work and within the range of other reports that I've seen.
The other side of the equation is the supply side. The supply side can be broken into 2 pieces: natural gas associated with oil wells and natural gas from gas wells. We believe that prior to the recent oil rig count reduction, there was approximately 16 Bcf per day of natural gas being produced associated with oil production. That's almost the equivalent of the Marcellus and Utica combined. Of the 16 Bcf per day of natural gas production associated with oil, about 8 Bcf per day is estimated to be associated with shale oil or unconventional oil plays. ..."
For the first time in a long while, oil isn't $90 to $100 per barrel, it's roughly half that. The industry's response has been to cut their 2015 capital programs to about 40% to 50% of their 2014 budgets. Given these reductions so far, the oil rig count is down about 56% and appears to be going further. Given that moving oil through low permeability rock is harder than moving gas through low permeability rock, the first year declines of unconventional resource oil wells are much steeper than gas wells and typically are in the 70% to 90% range. Given the continuing steep drop in the rig count and typically steep first year declines of those oil wells, I believe that we'll see a production response in the second half of this year. Some are predicting that we'll see it before then and they may be correct. Not only will this help on the gas supply side, but since about 40% of all NGLs are derived from natural gas associated with oil production, it will help with the NGL supply as well.
The other big piece of the supply equation is in Marcellus and Utica. Even in these plays, operators have typically cut their 2015 capital spending plans by about 40% to 50% versus 2014. The rig counts for both of these plays are down by about 42% and 44%, respectively. By late summer, some are forecasting that the rig count in the Marcellus and Utica may be down to about half of what it was last year. Cutting capital spending and cutting the rig count will affect production. In addition, the infrastructure is significantly constrained in the far Northeast portion of Pennsylvania. One pushback I get from this argument is that when the gas rig count plummeted in the second half of 2008 and beyond, the production response was unaffected and it kept going up into the right. I believe that it's different this time for multiple reasons. Back in 2008 timeframe, there were still vertical rigs drilling for gas. The operators dropped their vertical rigs first, and those rigs were not driving production. It was the horizontal rigs that were doing so. Today, there are no vertical rigs drilling the Marcellus or Utica, so decreasing the rig count should have an impact....
...Combining the coming growing natural gas demand with the probable response on the supply side, the outlook for supply and demand coming in to balance and improving natural gas prices are on the horizon. ...."