Southwestern Energy has agreed to sell its Fayetteville Shale E&P and related midstream gathering assets to Flywheel Energy LLC, backed by Kayne Private Energy Income Funds, for $1.865 billion in cash and assumption of approximately $438 million of future contractual liabilities.
The assets include 915,000 net acres, 3.679 Tcf as of year-end 2017 Proved Reserves, 716 MMcf/d of net production, and associated midstream gathering infrastructure and compression. The midstream assets have gathering volumes of 1.2 Bcf/d as of June 30, 2018, 2,045 miles of gathering pipelines, and 358,830 horsepower of compression. Through the transaction, Flywheel is acquiring a fully-integrated upstream and midstream unit with transportation secured to Gulf Coast demand centers and LNG export facilities through 2030.In February 2018, Southwestern Energy announced its intention to divest its legacy Fayetteville assets to reduce debt and accelerate Marcellus development. The Fayetteville divestment is a significant milestone in advancing Southwestern’s strategic plan. Following the transaction, Southwestern Energy expects additional annualized interest and organizational cost reductions of $60 million to $75 million. Post-sale, in line with its strategy, Southwestern will allocate up to $600 million over the next two years to accelerate development of its liquids-rich Appalachia assets. The Appalachian growth is expected to push Southwestern’s debt-to-EBITDA ratio to 2x by 2020.
Bill Way, President and CEO of Southwestern Energy, said, “We are pleased with the process, the outcome, and the resulting valuation of this significant asset… Our shareholders will benefit from an optimized portfolio, stronger balance sheet including improved financial flexibility, and the return of capital to all shareholders through a share repurchase program.”
Natural gas storage inventories increased by 69 Bcf for the week ending Sep. 7, according to the EIA’s weekly report. This injection is above market expectations, which were 65 Bcf. Before the EIA release, the October 2018 contract was trading at $2.848 per MMBtu, slightly higher than the October 2018 close yesterday of $2.829. After the EIA release and at the time of writing, the October 2018 contract was trading at $2.846, similar to before the EIA release.
Working gas storage inventories now sit at 2.636 Tcf, which is 662 Bcf below last year and 596 Bcf below the 5-year average.
See the chart below for projections of the end-of-season storage inventories as of Nov. 1, the end of the injection season.
This Week in Fundamentals
The summary below is based on PointLogic’s flow data and DI analysis for the week ending September 13, 2018.
- Dry gas production is up 0.295 Bcf/d week-over-week, with total dry production at 83.26 Bcf/d. The Northeast (+0.265 Bcf/d) and Texas (+0.229 Bcf/d) were the main contributors in the production increase. Notable production decreases came from the Rockies (-0.176 Bcf/d). Tropical Storm Gordon still has production down in the GoM – expect those volumes to return in the coming weeks.
- Canadian Imports are down 0.45 Bcf/d week-over-week, bringing Canadian Imports to 4.43 Bcf/d.
- Domestic natural gas demand decreased 1.72 Bcf/d week-over-week, with the decrease attributable to power burn (-4.01 Bcf/d) and the offset in ResCom (+2.14 Bcf/d). Total domestic demand decreased to 59.38 Bcf/d for the week.
- LNG exports were up 0.20 Bcf/d week-over-week, while Mexican Exports were down 0.31 Bcf/d.
Total supply is down 0.16 Bcf/d and total demand is down 2.02 Bcf/d week-over-week. With the decrease in demand outpacing the decrease in supply, expect EIA to report a higher injection next week. The ICE Financial Weekly Index report is currently expecting an injection of 81 Bcf for next week. Last year’s injection for the same week was 97 Bcf, while the 5-year average is 78 Bcf.
US crude oil stocks decreased 5.3 MMBbl last week. Gasoline and distillate inventories increased 1.3 MMBbl and 6.2 MMBbl, respectively. Yesterday afternoon, API reported a large crude oil draw of 8.6 MMBbl, alongside gasoline and distillate builds of 2.1 MMBbl and 5.8 MMBbl, respectively. Analysts were expecting a crude oil draw of 2.7 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted a significant increase of 10.1 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production was estimated to be down 100 MBbl/d from last week, per EIA. Crude oil imports were down 123 MBbl/d last week, to an average of 7.6 MMBbl/d. Refinery inputs averaged 17.9 MMBbl/d (210 MBbl/d more than last week), leading to a utilization rate of 97.6%. Although total petroleum stocks posted a significant build, large crude oil withdrawal, Hurricane Florence increasing strength and approaching the coast and EIA lowering it’s crude output expectations for 2018 and 2019 are supporting prices. Prompt-month WTI was trading up $1.67/Bbl, at $70.92/Bbl at the time of writing.
Prices traded in the tight range of $67/Bbl to $68/Bbl. Supply shortage worries and a weaker global demand growth were the continuing headlines that pulled prices in both directions. Prices surged over 2% on Tuesday as bullish sentiment increased. The surge in prices was due to Hurricane Florence gaining strength, Iranian sanctions, and increasing geopolitical tensions in Middle East.
Although geopolitical tensions, supply outages and Iranian sanctions were the main catalysts behind the price surge on Tuesday, Hurricane Florence and its possible impact on supply helped the price action as well. It is unclear how much Hurricane Florence will affect the supply as it makes landfall later this week in North and South Carolina. It is also possible that the hurricane will impact demand in the region as it makes landfall.
The boost in prices was also caused by rising geopolitical tensions in Iraq and Libya. Rioters burned down several buildings in Basra, a major city in Southern Iraq where the country produces significant amount of crude. The rising tensions in Iraq increased the supply shortage worries as Iraq is a major OPEC producer. The risk with Libya’s oil production volatility also increased as gunmen attacked the country’s national oil company killing two people and injuring nearly a dozen others. Libya’s oil production has been unstable as the country constantly faces riots and attacks. Libya’s oil production has been recovering, however the latest attack on Monday once again raised the skepticism around the stability of production from the country and increased bullish sentiment.
The increasing geopolitical tensions added more risk to a supply shortage scenario as the market expects further declines from Venezuela and Iran as November 4 approaches. The US sanctions on Iranian crude already squeezed some of Iran’s exports as the country’s exports to the Asian market have declined. The US government had told its allies to reduce Iranian exports, and some Asian buyers seem to be falling in line. Although Iranian sanctions are showing some early signs affecting countries exports levels, the true impact of how much supply will be lost will not be determined until US announces the 2nd round of sanctions, which is due on November 4.
The bullish sentiment in the market is certainly increasing with rising geopolitical tensions, declining Venezuelan production and approaching Iranian sanctions. However, the on-going US-China trade wars and worries around a weaker global economy and demand growth will be working against any significant price gains. Continuously increasing US production will be another bearish factor that will keep a lid on prices, in addition to the gloomier demand outlook.
The market remains with a bullish bias, but the failure of prices to break above and maintain the $71/Bbl level suggests that the risks associated with possible tariffs may pressure prices back to the key support areas associated with the 200-day moving average at $65.31/Bbl. This commonly watched indicator is rising and is starting to narrow the trade range for WTI. Any breakdown and daily close below this key support will remove the bullish bias from the market and will likely force some liquidation by the speculative longs. However, this notable average has held the bull market for a year now and is expected to continue to hold. Should prices test this level again and it holds, prices will likely head back to the high end of the range at $71/Bbl. At that point, the market will need additional news for an extension beyond that level and onward to the June highs at $75/Bbl. A breakdown below the key average will likely take prices down to the April lows around $62/Bbl. Some elements to the trade that will continue are the volatility and daily headline risks along with short-term supply outages due to rising geopolitical tensions. As the market understands the fundamental impacts of sanctions and tariffs later this year, prices will start to consolidate into a lower range. The quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe this range to be $58/Bbl-$65/Bbl for an extended period of time.
Petroleum Stocks Chart
US crude oil stocks decreased 4.3 MMBbl last week. Gasoline and distillate inventories increased 1.8 MMBbl and 3.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil draw of 1.17 MMBbl, alongside gasoline and distillate builds of 1.0 MBbl and 1.8 MMBbl, respectively. Analysts were expecting a crude oil draw of 1.29 MMBbl. The most important number to keep an eye on, total petroleum inventory levels, posted an increase of 3.6 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production was estimated to be up 84 MBbl/d from last week, per EIA. Crude oil imports were up 230 MBbl/d last week, to an average of 7.7 MMBbl/d. Refinery inputs averaged 17.6 MMBbl/d (81 MBbl/d more than last week), leading to a utilization rate of 96.6%. Although crude oil withdrawal was higher-than-expected, the build in total petroleum stocks and expectation of US-China trade dispute further escalating with another round of tariffs on $200 billion worth of Chinese goods have pushed prices down. Prompt-month WTI was trading down $1.47/Bbl, at $67.25/Bbl at the time of writing.
Prices traded in the $68/Bbl to $70/Bbl range last week. Prices had a volatile week as they mainly traded on speculative bullish and bearish headlines. Although prices had a strong start to the week, they gave up their losses to fall lowest levels in about a week.
Prices were buoyed on Tuesday with increasing supply worries as some offshore production was shut off due to anticipated damage from Tropical Storm Gordon. However, the price action due to the storm was short-lived, and prices gave up their gains as the storm weakened and moved away from the production areas.
Although Tropical Storm Gordon and possible loss of production from the Gulf of Mexico was the main headline for bullish sentiment earlier in the week, Iranian export levels and the upcoming sanctions in November are still the main catalyst supporting prices and keeping the bias bullish. Iranian exports are already showing signs of rapid declines. However, it is still unclear what the true impact will be when the sanctions are announced in November.
The market seems to still have a bullish bias, mainly due to declining production from Venezuela and Iranian sanctions causing a supply disruption. However, sentiment could shift quickly, as there are numerous factors that could threaten prices – especially if the impact from Iranian sanctions is not as drastic as the market is expecting. One of the biggest threats to prices is the ongoing US-China trade wars, which could get worse, as the public comment period on the next round of sanctions is closing and President Donald Trump seems to be leaning toward the implementation of $200 billion of tariffs on Chinese goods. The crisis in Turkey is still causing fears on the global market, as turmoil may spread and emerge in other economies. Both of these factors tremendously affect the overall health of the global economy and growth as well as demand growth. Prices will continue to be pressured, with the possibility of a weakening economic growth and weaker demand.
Continuously increasing US production is another bearish factor that will keep a lid on prices. Producers are taking advantage of higher pricing as they strengthen their balance sheets and, complete more efficient wells while building DUCs to prepare for further ramp-up when additional takeaway capacity is available. Saudi Aramco calling off the IPO could also be another threat to prices, as Saudi Arabia may now not be as interested in keeping prices higher – especially in a time when they have already starting increasing production along with Russia.
The market still has a bullish bias, as the test of the 200-day moving average failed and, as expected, the rebound has now taken prices to the high end of the recent range ($64.43/Bbl-$71.10/Bbl). This notable moving average (now trading at $65.06/Bbl) has held the bull market for a year now. This average will hold near-term declines. However, should this average break down, a significant amount of selling will damage the long-term bias, and declines can take prices down to the April lows around $62/Bbl. Last week’s continued rebound off of the test of the average took prices over $70/Bbl briefly, only to retrace at the end of the week. Expect the high end of the recent range to be tested early this week. However, until the supply and demand fundamentals are well understood, there will be hesitation to take prices too high. One element to the trade that will continue is the volatility and daily headline risk. As the market resolves this uncertainty later in the year, volatility will recede and prices will start to consolidate in a lower range. The quota easement, continued US growth, and fears of a weaker demand growth lead Drillinginfo to believe this range to be $58/Bbl-$65/Bbl for an extended period of time.
Petroleum Stocks Chart