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Morningstar | Reducing FVEs for Antero, Gulfport, and Range to Reflect Near-Term Weakness in Gas Prices

We are revising our fair value estimates for Antero, Gulfport, and Range Resources to $8, $7, and $17, respectively, after the recent deterioration in near-term natural gas prices. Our valuation models incorporate three years of strip prices before reverting to our midcycle forecast, which is unchanged at $3 per barrel. When we last updated these models, U.S. prices were expected to average $2.80 per thousand cubic feet, $2.80/mcf, and $3/mcf,respectively, for 2019, 2020, and 2021. However, current expectations are much weaker ($2.60/mcf, $2.70/mcf, and $2.70/mcf in the same periods).

U.S. natural gas inventories have been rising slightly faster than the seasonal norm since the end of the winter withdrawal, but are still below the five-year average. However, the recent wave of liquefaction and export facilities around the world has enabled the commodity to move away from areas of oversupply, reducing regional supply-demand imbalances and forcing domestic benchmarks to move in lockstep with overseas prices. Because of the liquefied natural gas export surge, global supply is outpacing demand growth, especially in Europe, where U.S. LNG converges with Russian exports. The latter appears willing to tolerate weaker prices for now to defend its share of the European market, potentially backing U.S. exporters into a painful corner.

However, all of this is expected to play out in reverse in the next couple of years as global demand growth continues rising (supported in many countries by a regulatory push toward cleaner fuel as natural gas can displace coal, and offset the instability of solar and wind power). The growing demand for U.S. exports cannot be satisfied with the lowest-cost resources, including associated gas from shale oil projects, developed fields in decline, and the cost-advantaged northeast Marcellus Shale area. Our midcycle forecast of $3/mcf reflects the marginal cost of drilling in the southeast Marcellus, Utica, and Haynesville areas.