Natural Gas Could See Hope Through Bankruptcies

Alan Penny

24 January 2020

3 min read

natural gas

  • Natural gas markets at historically cheap levels
  • Bankruptcies over 204 the last year
  • Drilling firms not managing to break even

The natural gas markets have been absolutely hammered over the last couple of years, as the oversupply of natural gas continues to be a major issue. For example, the Americans drilled 17% more in 2019 than they did in 2018, in a market that was already oversupplied.

Because of this, the predictable reaction in price has come to fruition, with natural gas currently trading near $1.85, this being much lower than its historical norm.

The fallout of cheap gas

There have been more than 200 oil and gas companies in North America alone that have filed bankruptcy since 2015, and it’s likely that we will see quite a few more later this year. There have been numerous filings involving a combined $121.7 billion in debt by these companies. These were the figures quoted by Haynes and Boone, a prominent law firm that specializes in such things.

a perfect storm when it comes to losses, and if we get a global slowdown, it could cause even more troubles

These numbers continued all the way through the end of the third quarter in 2019, and we have even seen nine firms go bankrupt since then. Bankruptcies surged by 50% compared to a year earlier, which makes sense considering that the commodity itself simply does not attract money.

It’s possible that natural gas does recover in 2020, but we will need to see quite a few more bankruptcies. That’s because the IEA still predicts that the oil market will remain in a state of surplus this year, even with the OPEC cuts.

Keep in mind that a lot of the natural gas shale companies also function in that space as well. In other words, even if natural gas turns around, they may still have trouble with crude oil. This is a perfect storm when it comes to losses, and if we get a global slowdown, it could cause even more troubles.

We are starting to see a slowdown in the pace of drilling as the Marcellus shale region has essentially ground to a halt. The EIA also sees production of natural gas contracting in the Anadarko, Appalachia, Eagle Ford, and Niobrara scale regions. Eventually, the supply could get work through. This is crucial for recovery.

Drilling companies not breaking even

The markets are starting to punish not only drillers, but also oil and gas service companies such as Halliburton, and even pipeline companies. Oil and gas flow should slow down, hurting the pipeline companies until balance can be brought back to the market.

In fact, most analysts believe gas in the United States is far beyond the break-even point. Therefore every time they drill, they lose money. This cannot go on forever, and once we get a huge wave of bankruptcies, that may be the beginning of the end of the downtrend in natural gas, at least for this business cycle.

When the downtrend abates, the market is likely to shoot higher and perhaps go looking towards the $3.00 level. That is extraordinarily long-term thinking, but the basis of a potential turnaround in the natural gas markets is starting to present itself.

Written By
Alan Penny

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