Leading Appalachian producer EQT has shut-in ~1 Bcf/d of natural gas production in response to low prices. Equitrans Midstream (ETRN) is bearing the brunt of the production cuts, and East Daley expects the company to post lower 1Q and 2Q23 earnings as a result.
Separately, EQT and ETRN have reached a deal for EQT to buy back its former midstream unit in an all-stock deal, the companies announced Monday (March 11). EDA will cover the EQT-ETRN merger and its implications in a future post.
EQT announced the gas supply curtailments in a March 4 press release. The producer said it expects the well closures to last at least through the end of March, when it will reassess market conditions.
EQT started shutting down wells on February 24, according to flow samples East Daley tracks in the Northeast. Based on our tagging of G&P pipeline data, the producer appears to have curtailed production exclusively in the Southwest Pennsylvania (SW-PA) region of the Marcellus, where EQT normally produces ~3.1 Bcf/d of gross gas. The shut-ins have reduced production in the region by ~30%. Most of the decline (~750 MMcf/d) has occurred on Equitrans’ (ETRN) Pennsylvania gathering system (see red line in the figure).
Using the ETRN Financial Blueprint, users can estimate the impact of the curtailments to asset performance. East Daley ran a scenario analysis assuming a 300 MMcf/d cut in 1Q24 volumes (average); the lower flows result in an 8% hit to our current 1Q24 forecast for EBITDA ($21MM).
We assume EQT will keep its wells closed through the low-demand spring and return to normal operations starting in June ’24. Based on this scenario, we estimate a 500 MMcf/d cut in 2Q24 volumes, which according to the ETRN Financial Blueprint would drop earnings by 9% ($29MM) for the quarter.
ETRN’s potential downside is limited by minimum volume commitments (MVCs) with EQT. ETRN has 3 Bcf/d of MVCs on the Pennsylvania gathering system, and current throughput is ~4 Bcf/d. The MVCs step up to 3.5 Bcf/d when MVP comes online, and then to 4 Bcf/d after another 12 months, effectively removing this curtailment risk.
EQT employed a similar strategy in 2020, shutting in ~1.4 Bcf/d when Appalachian prices fell below $1.50/MMBtu. The producer brought supply back three months later, only to reduce volumes once again in September ’23. EQT restarted full production heading into the winter after prices recovered above $1.50 (see red line in figure below).
We estimate EQT will begin bringing back production in May, ahead of the expected start of Mountain Valley Pipeline (MVP). Historically it has taken EQT about two months to restore production after restarting wells. This would mean recovery to EQT’s 2023 production levels by the end of June ‘24.
ETRN expects MVP to start service on June 1, and EQT holds over 1 Bcf/d of capacity on the new pipeline. The start of MVP should help Dominion South spot pricing and give EQT further incentive to restore operations. In our Macro Supply and Demand Forecast, EDA forecast Henry hub prices will recover to $2.50/MMBtu by July 2024, providing additional uplift to Appalachian prices – Alex Gafford Tickers: EQT, ETRN.
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