The Natural Gas Market Is in a Summer Meltdown

Some of the country’s largest natural gas producers are tearing up their drilling plans, relenting to prices for the fuel that have fallen to their lowest summer level in two decades.

Natural gas prices typically move higher in the heat of the summer, as demand from electricity plants surges to power air conditioners. This month’s heat wave in the Eastern U.S. has generated record consumption at power plants, yet natural gas prices have continued to slide due to bountiful supplies.

Natural-gas futures for August delivery traded down 3.3% to $2.169 per million British thermal units on Friday. That is a fresh three-year low and the lowest July price since 1999.

Meanwhile, shares of the producers who have flooded the market with gas have been punished. Those operating in Appalachia, the country’s most prolific gas-producing region, have been particularly hard hit.

Cabot Oil & Gas
Corp.


COG -12.07%

,

EQT
Corp.


EQT -3.44%

and

Range Resources
Corp


RRC 0.78%

have each shed more than 28% over the last three months.

“The equity and gas markets are sending a clear message to operators to cut growth,” Kyle Derham, a member of EQT’s executive committee, told investors Thursday on a call to discuss the Pittsburgh company’s second-quarter results. “While we have started to see a pullback in activity, more is needed to balance the market.”

EQT, which is the largest U.S. gas producer, plans to pay down debt and buy back its beleaguered stock—down about a third since April—rather than drill, executives said.

Even Cabot, long a darling among investors for its ability to profit amid low commodity prices, has suffered. Its shares plunged more than 12% on Friday, the stock’s worst day since 2008, when global financial markets were melting down and the fracking boom hadn’t yet taken off.

Executives said Friday that they would run just three drilling rigs and two hydraulic-fracturing fleets with prices so low. Such skeleton crews in its fields in northern Pennsylvania will yield year-over-year production growth of around 5%, instead of the double-digit growth analysts have expected.

“We think it is absolutely wrong for Cabot to go out and…grow into this market,” said Dan O. Dinges, chief executive of the Houston company. “We’re kind of throttled back about as far as we can get.”

So far laying down rigs hasn’t prevented new highs in production. The number of rigs drilling specifically for natural gas is down about 16% from the start of the year, according to oil-field service firm

Baker Hughes
,

which said Friday that there were 169 rigs drilling for gas this week, five fewer than the week before.

The biggest problem for Appalachian producers, who tap the Utica and Marcellus Shale formations beneath Pennsylvania, West Virginia and Ohio, isn’t a lack of consumption. Exports to Mexico and overseas markets are at all-time highs. Demand is also on the rise from electricity producers, who are increasingly shifting away from coal, and industrial users such as chemical makers on the Gulf Coast.

Rather, Appalachian producers, and to a lesser extent those drilling in the Haynesville Shale that straddles the Louisiana-Texas state line, must contend with gas spewing from the Permian Basin in West Texas. Oil producers there are unleashing vast volumes of gas as a byproduct of drilling for crude.

Drillers in some regions, including the Permian Basin, plan around oil prices, which are up about 24% this year. They are typically ambivalent to gas prices.

The U.S. has more than doubled its crude output over the last decade. Much of the growth is due to the Permian Basin of West Texas and New Mexico. WSJ traces the hotspot of North America’s crude oil boom, with a look at challenges that producers in the region face.

At times this year natural gas has been so plentiful in West Texas that the price has turned negative, meaning that producers have to pay pipeline operators more to deliver gas to market than the fuel fetches once it reaches buyers.

Access to the market is likely to improve for Permian gas sellers later this year when the 447-mile Gulf Coast Express pipeline opens, connecting wells in the West Texas desert to exporters and consumers on the Gulf Coast.

Kinder Morgan
Inc.,

which built the pipeline with two other companies, said last week that the supply route is on track to become operational in late September, ahead of the planned October start. Kinder Morgan is building a second pipeline along a similar route that it expects to open in autumn 2020, and the company is in talks with customers to build a third.

Though gas prices at a trading hub near Midland, Texas have bounced back from the negative $9 per million British thermal units reached this spring, they remained less than $1 this month, according to

Jefferies Financial Group
Inc.

Appalachian producers such as Cabot and EQT can’t compete with that.

“Gas stocks will remain broken until the industry shifts its stance on growth in both the Haynesville and Appalachia,” analyst with Tudor, Pickering, Holt & Co. wrote in a note to clients on Friday.

Write to Ryan Dezember at ryan.dezember@wsj.com

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