Analyzing the shale production market

I’ve done a number of posts analyzing the natural gas market and looking at where all this production could possibly go. To that end I’ve been using the production numbers to show how it’s driving a push to get gas to new markets, such as through LNG exports.

Eric from Cranford, NJ is looking at it from the other end. He’s analyzed the market around Shale gas production and has shown that the rigs are way over-producing and that the market is in a free fall. Debt in in the industry is rampant and drillers will be drilling at a loss for now and into the foreseeable future. He reckons the shale drillers have made themselves a bubble that’s now on the verge of total collapse.

EIS Scoping Comment 20150227-5507 submitted on February 27, 2015 by Eric Weisgerber called for an examination of the general investment and financial environment for shale gas fracking companies to judge their long-term viability, a determination of the likelihood of the current environment being a “bubble” and thus full of malinvestment, and an examination of the necessity of the shale gas industry to never stop drilling in order to keep up production even in a money-losing environment. Mr. Weisgerber also called for a vigorous and skeptical examination of the financial justifications for the pipeline as stated by PennEast.

As followup to the above scoping comment I am submitting the article “Natural Gas Prices To Crash Unless Rig Count Falls Fast” published on March 22, 2015 on

He includes some quotes from the article in his submission (note: these bullets are out of quotes just for formatting purposes – all of these bullets are Eric’s):

  • rig counts for shale gas drilling are too high
  • an orgy of over-production is taking place in the Marcellus Shale
  • shale gas plays are not commercial at less than about $6/mmBtu except in small parts of the Marcellus core areas where $4 prices break even. Natural gas prices have averaged less than $3/mmBtu for the first quarter of 2015 and are currently at their lowest levels in more than 2 years.
  • Bank of America fears sub-$2 gas prices now that winter heating worries are over.
  • The only criterion that seems to matter to investors these days is production guidance. If production drops, stock value will fall even farther than it has already. This will trigger loan covenants if asset values fall below thresholds set out in the loan agreements. When that happens, the loans will be called unless the companies can come up with more cash. This might result in bankruptcy. So, the drilling must continue as long as there is capital.
  • The table shows financial data through year-end 2014. What it reveals is not pretty. 2014 negative cash flow reached $15.5 billion, an increase of $7.2 billion over 2013. [Table of 22 top operators in the shale gas plays, see below]
  • On average, shale-gas companies earned only 68 cents for every dollar that they spent in 2014. Total debt increased almost $10 billion to $93.5 billion and average debt exceeded stated equity by 18% excluding companies with negative equity including the now-bankrupt Quicksilver Resources.
  • Shale gas plays are commercial failures. The misuse of capital to continue to increase production while destroying price and shareholder equity has gone on for too long. Investors should demand that shale gas companies cut rig counts at least as much as tight oil companies have.

He concludes:

The article quoted above provides evidence in support of the importance and necessity for an investigation into the true need for the PennEast pipeline. It shows that the current environment for shale gas plays is highly negative and that the future viability of those plays is gravely in doubt. It makes no obvious sense to build the PennEast pipeline, therefore the reasons for building it must be non obvious, unstated, and quite possibly highly speculative at the best, and fraudulent at the worst.

Eric’s analysis dovetails nicely with my own. Both sides show that there’s a glut of natural gas in the market place, and that producers are desperate to get the gas somewhere to prop up their drilling operations. They are in even more dire straights then you could imagine because they have covenants in their drilling agreements with the land owners that they must continually produce from the land. If they stop they lose their rights to drill. So they’re caught between losing a big percentage of their investment – or losing the entire damn thing.

This is where the LNG exports come in. They’re the hail mary pass the industry is making to save all that shale investment. If they can open up new markets their investments will be saved, and as a bonus gas prices will begin to rise again.

It’s been said here and elsewhere countless times, but bears repeating: This gas is not for NJ and PA. PennEast is lying to you and the government in their FERC application.

Eric’s full submission is available below:

Eric’s submission – FERC Generated PDF

Eric’s submission – FERC Generated PDF Alternate Site

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Mike Spille

I'm a thinker, an analyzer, a synthesizer. Maybe not in that order. I live in West Amwell NJ with my wife Kristina, our two kids Day and Z, our two dogs Fern and Cinna, and three cats Ponce de Leon, Oliver, and Doolittle.

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