Outlines challenges faced by pure play US natural gas producers
Advocates for renewed focus on capital discipline and profitability
HOUSTON — Bayou City Energy (“BCE”), an E&P-focused private equity firm, today published a white paper titled, “Natural Gas Producers: Why Don’t You Stay?”
To state the obvious, natural gas prices are depressed. Several factors have contributed to the oversupply of natural gas domestically, including, but not limited to:
- Increased domestic production from dry gas producers
- Increased domestic production via associated gas from oil basins
- Increasing gas-to-oil ratios in key oil plays
- Lower than expected demand due to an unusually warm winter
- “Fits and starts” nature of liquified natural gas (LNG) export growth
As of March 4 2024, Henry Hub natural gas price was $1.92/Mcf and the 2024 strip was $2.56/Mcf, down 26% and 27%, respectively, from only six months prior. These prices are low enough to eliminate any meaningful shareholder return for the foreseeable future in the dry gas producer space but have yet to persuade these producers to idle a material number of drilling rigs.
US natural gas companies continue to rely on misguided framing in comparing themselves to only the other dry gas producers when ranking drilling inventory competitiveness, thereby justifying the decision to bring on more gas volumes. It’s imperative to acknowledge that dry natural gas basins do not produce the lowest cost molecule particularly relative to associated gas molecules.
BCE advocates for pure play US natural gas producers to drastically change their capital allocation strategies given the current state of the domestic natural gas market and to seek consolidation opportunities with more liquids-rich producers.
Will McMullen, Managing Partner of Bayou City Energy, said, “BCE strives to be a good steward of its investors’ capital, consistently prioritizing free cash flow generation and distributions. We further advocate for responsible production and strategies that benefit the oil and gas sector as a whole. Our industry complains about the lack of attention we receive from generalist investors despite acknowledging that profits and shareholder returns are what will ultimately bring investors back to our space. So, why not prioritize free cash flow above drilling capex? The 2024 outlooks from major public pure play gas producers were encouraging, but not enough, to remedy our depressed natural gas markets. Further drilling cuts leading to reinvestment rates below 50% are part of our call to action, as is the tacit acknowledgement that dry natural gas basins are not the lowest cost gas molecules.”
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About Bayou City Energy (“BCE”)
BCE, founded in 2015, is a private equity firm that invests in assets in “out-of-favor” basins. Our core strategy focuses on acquiring PDP assets at attractive entry valuations, consolidating where applicable and growing through measured re-investment of cash flow. BCE has approximately $2bn of assets under management as of Sept. 30, 2023. Notably, BCE has made distributions to its LPs for the last 21 quarters in a row.
For additional information on Bayou City Energy please visit www.bayoucityenergy.com