American Oil and Gas Reporter - May 2020 - 44

SpecialReport: Dry Gas Strategies
That is opening opportunities for operators with dry gas leases, particularly
in the gas shale plays that slightly more
than a decade ago had producers running
twice as many gas as oil rigs. In the last
week of April, the 81 active natural gasdirected rigs were concentrated in the
Marcellus Shale play in Ohio, Pennsylvania and West Virginia and the Haynesville in Louisiana and East Texas, according to the U.S. Energy Information
Administration. Those two plays, the
agency reports, accounted for 78% of all
active U.S. rigs.
U.S. dry natural gas production set a
record in 2019, averaging 92.2 billion
cubic feet a day, EIA data indicates.
However, the agency says it expects domestic gas output to average only 91.7
Bcf/d in 2020, with production falling
from 94.4 Bcf/d in March to 87.5 Bcf/d
in December as associated gas output
declines. EIA sees dry gas production
moving in the opposite direction in 2021,
driven by higher prices and incremental
demand in key sectors such as power
generation and liquefied natural gas exports. Accordingly, the agency forecasts
that Henry Hub spot prices will average
$2.11/MMBtu in 2020, increasing to an
annual average of $2.98 next year.
Appalachian Gas
Production in the Appalachian Basin

was predicted to drop by as much as 5%,
along with a reduction in capital spending,
even before Saudi Arabia and Russia
began their oil price war on March 7, recalls Douglas Kris, vice president of investor relations for Montage Resources.
Their subsequent agreement to cut production and the reduction in U.S. associated natural gas production, supported
by slowly recovering economies in many
countries and China's agreement to purchase more U.S. natural gas, provide
some reasons for optimism over gas demand, he assesses.
"If you want to put a time frame on
something, the second quarter is a throwaway for not only gas and oil but every
industry globally, because of what has
been going on with the pandemic. As
natural gas companies migrate to late in
the third quarter and into the fourth
quarter, you are going to see robust results
from a corporate-level perspective and
cash flow generation starting to come
out as these gas prices start to get even
more teeth in them," he predicts. "We
had abnormally hot winters the past two
years, so if you get any normalization of
a winter, you can see some pretty interesting things happen to gas prices."
Montage, formed in a 2019 merger of
Eclipse Resources and Blue Ridge Mountain Resources, is developing its 195,000
net acres in the Utica and Marcellus shale

Employing technologies in different ways is boosting Montage Resources' Appalachian
Basin production. The company says cycle times from well spudding to sale have
dropped from 225 days to 140, with completion crews now completing between nine and
12 stages a day on average.

44 THE AMERICAN OIL & GAS REPORTER

play in Ohio, Pennsylvania and West Virginia. Kris describes the company's holdings as equally split between dry gas and
wetter Marcellus. Across that area, he
notes Montage has something that is
slightly unusual in the basin and unique
to the company: it is a stacked play, with
the Marcellus Shale sitting right above
the Utica.
The company's initial 2020 operating
budget for its acreage in Monroe County,
Oh., emphasized wet gas, with 75% of
production slated to come from the Marcellus formation, he says.
"In late March, Montage noted this
change in the macroeconomic environment, and quickly made a strategic change
that flip-flopped the activity level to be
75% dry gas and 25% Marcellus. The
company has the ability to do that for a
number of reasons-its acreage footprint
in that stacked play environment, and its
acreage with permits ready and pads
ready in terms of attacking the acreage
from the drill bit perspective at all times.
That allows the company to quickly shift,"
he describes.
According to the company's first-quarter 2020 operational update, Montage's
preliminary net production for the first
three months of 2020 averaged approximately 611 million cubic feet of gas
equivalent a day, with 65% of its 2020
gas production hedged at an average floor
price of $2.62/MMBtu. It also has increased its 2021 gas position.
Cutting Cycle Times
Montage turned five Monroe County
Utica dry gas wells to sales in 2019. The
company is running one rig on its Appalachian Basin acreage, with the midpoint
of its 2020 capital spending set at $155
million, Kris says. Its current guided production forecast is between 81%-83%
natural gas production, with 65% of its
annual capital expenditure frontloaded
to the first half of 2020.
"As natural gas prices improve, Montage's leaning would be to use that additional cash flow generation to pay down
debt, whether it is buying back bonds in
the marketplace or paying down its reserve
base lending facility," he reports. "In this
environment, you get much more of an
evaluation uplift by reducing debt than
you do by accelerating activity. What
that ultimately means is that even if gas
prices improve, you are not going to see
the rig count in Appalachia suddenly go
up based on pricing. I think companies

American Oil and Gas Reporter - May 2020

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