COG Cabot Oil and Gas Corp

By Ryan Dezember 

Investors are rewarding energy companies who are promising to produce less energy.

The producers that have glutted the market with cheap shale gas are finally relenting, dialing back drilling plans and pledging restraint after years of depressed prices battered their growth-centric business models.

Investors drove shares of CNX Resources Corp. up nearly 16% on Tuesday after the company told investors that it reduced drilling activity this summer amid an unseasonable slump in natural-gas prices.

The Pittsburgh-based company said it would spend 9% less than originally planned in 2020, which in turn would decrease its expected output by about 6%, helping to free up cash to pay back debts coming due in 2022 and to buy back its shares.

"This is the signal investors have been waiting for," said Welles Fitzpatrick, an analyst with SunTrust Robinson Humphrey.

CNX's assurances come after similar vows made last week by rivals operating in Appalachia, including Range Resources Corp., Cabot Oil & Gas Corp. and Southwestern Energy Co., when each disclosed their own third-quarter results.

Executives with all three of those companies said low gas prices were prompting cutbacks and austerity. Should prices rise this winter, they said that they are likely to use the extra cash to continue buying back their beleaguered shares and to repay debt rather than send drilling rigs into hills of Appalachia where they have unleashed a market-swamping flood of natural gas. Shares of the three companies have risen following the release of their quarterly results and outlooks.

"Even with higher prices, I think there are a lot of shareholders out there, including a lot of shareholders around this table, that would like to see value come back to them as opposed to just see growth for the sake of growth," Cabot Chief Executive Dan O. Dinges told investors last week.

Such statements are already receiving a stiff test.

Natural-gas prices are on the rise, thanks to a huge cold front forecast to sweep down over much of the country as well as natural-gas producers who are yielding to depressed prices for the heating fuel and dialing back production.

U.S. natural-gas futures for November delivery rose 6.2% on Tuesday to $2.597 per million British thermal units. Gas for December delivery climbed 3.3% to $2.639.

Those gains follow a 6.3% jump on Monday, which was the best day for futures since January.

Forecasts predict a blanket of frigid temperatures over most of the country during the first half of November. A cold front that has already delivered freezing temperatures to Minneapolis and may bring snow to Chicago before the end of the week is expected to spark heating demand as far south as Atlanta and Houston, according to weather service Maxar.

Sharp as the recent rise in prices has been, neither producers nor analysts and investors anticipate prices pushing much higher or sustaining weather-related gains.

Hedge funds and other money managers have built up a big bet that prices will fall, with short positions outnumbering wagers on rising prices by about three to one as of last week, according to U.S. Commodity Futures Trading Commission data.

The short bet is approaching the size of one speculators made in August, which was the largest net-negative wager on natural-gas prices in more than a decade. The August short ended poorly when prices shot up 25% in September on unseasonably steamy weather that kept air conditioners running and demand for gas high.

Bank of America Merrill Lynch analysts last week lowered their outlook for gas prices during the first quarter to $2.50 per million British thermal units, down from $3, as well as their forecast for all of 2020, during which they now expect natural gas to average $2.35, down from $2.60.

A big reason besides sufficient stockpiles and robust production that the analysts believe natural-gas prices will be limited is that prices for Appalachian coal -- with which natural gas competes as a fuel for power plants -- have collapsed. Down roughly 40% from last year's highs, cheap coal will limit how high gas can rise before electricity producers switch fuels, the Bank of America analysts wrote in a note to clients.

Write to Ryan Dezember at ryan.dezember@wsj.com

(END) Dow Jones Newswires

October 29, 2019 17:06 ET (21:06 GMT)

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