The Weekly USA Oil & Gas Update: 13th January 2016

Rig Counts - select states with key plays

Oil & Gas Prices - Bloomberg/EIA

General News

Appalachian producers cut capex spending 54%

According to numbers compiled by S&P Capital IQ and SNL Financial, the top eight Appalachian drillers, a group which include spending leaders Chesapeake, Antero, and Southwestern Energy, cut their capital spending in Q4 2015 by 54% from the previous year's budget. Although none have announced Q1 2016 budgets yet, analysts expect all these companies to continue at lower spending levels. The upstream producers' problems could soon become the problem of midstream companies as well, according to analysts at Tudor Pickering Holt & Company, as producers let their production decline rather than sell into depressed markets, and cut back on their pipeline and processing needs. Despite the recent rally in natural gas prices, analysts expect 2016 to be a challenging year for the industry. given large storage supplies, pent-up production and a warm winter. Article here

Unconventional Oil & Gas News

Recent completion of pipelines lowering Marcellus price differential

The Marcellus produces about 1/4 of all natural gas consumed in the US, but producers typically take a steep price discount compared to the national market, generally regarded as the Henry Hub. This is because of a lack of takeaway pipelines in the Marcellus, which limits the markets Marcellus gas producers can sell into. Recently, new pipelines have come online, opening up new markets and reducing that differential, which was around $1.65 last July, down to an average of 89 cents at Transco's Leidy Hub since December. Over the next couple years, as more interstate pipelines come online, we should see this differential reduced even further, providing even more favorable economics for natural gas producers in the Marcellus and Utica. Article here

Environment and Safety News

Governor Brown calls for state of emergency on natural gas leak

For the last two months, large amounts of natural gas have been leaking near the city of Los Angeles from a Southern California Gas Co underground storage facility. Thousands of families have been called to evacuate the area and two nearby schools have closed. Due to the "prolonged and continuing" nature of the gas leak, California's Governor Jerry Brown has declared a state of emergency. Article here

Mergers and Acquisitions News

2016 could be a "year of reckoning" for small oilfield services firms
According to Chris Wolfe, oilfield services practice group lead at Haynes and Boone in Houston, "[t]he oilfield services sector is no exception to Darwinism--the weakest middle market companies did not survive in 2015 and it is likely that more will not survive in 2016." Wolfe expects significant contraction in the services market in 2016, with no recovery until the second half of 2017. Further complicating the environment for smaller service providers are the many mergers and acquisitions among E&P companies, which will disrupt service companies' long-term relationships. One way to survive this downturn is to sell or merge with stronger rivals, but mergers and acquisitions among these service providers may be limited, according to Osmar Aib at Credit Suisse. Abib says that "the current level of uncertainty and volatility really makes M&A challenging, at least in the near term." Article here