Low US natural gas prices are hurting oil producers’ cash flows

Falling US natural gas prices in early 2024 have hit the cash flow generation of dozens of listed companies, mostly oil producers.

Financial reports from 36 publicly traded oil companies that produce most of their crude in the United States showed that combined cash from operations fell to $23.3 billion in the first quarter of 2024, down 12 percent. compared to the first quarter of last year. The US Energy Information Administration (EIA) said in an analysis this week.

Benchmark US crude oil prices, West Texas Intermediate (WTI), fell 2% between the first quarter of 2023 and the first quarter of 2024. However, the US crude oil production of these 36 public companies increased by 5 %, up to almost 4.2 million. barrels per day (bpd).

That’s because OPEC+ production cuts have supported crude oil prices over the past year and spurred higher output among non-OPEC+ producers, including U.S. firms, the EIA said.

Higher crude oil production at near-constant prices would typically mean increased cash from operations for companies. However, “substantially lower natural gas prices likely hindered these companies’ revenues,” the EIA noted.

One of the warmest winters on record in the United States created a glut of natural gas in the first quarter, dragging benchmark gas prices to their lowest levels in three decades and prompting producers, who had been pumping at record rates, to reduce production drilling.

The US benchmark price for the first month at Henry Hub settled in mid-February at its lowest level since 1995 – except for a few days during the peak of the 2020 pandemic.

US natural gas prices fell 26% from the first quarter of 2023 to the first quarter of 2024.

In January, the Henry Hub price averaged $3.18/MMBtu, then fell to $1.49/MMBtu in March, marking the lowest average monthly inflation-adjusted price since 1997. Additionally, prices from February to April 2024 were the lowest ever recorded for those months, the EIA says.

The 36 public companies analyzed by the EIA focus on crude oil production, but associated natural gas production still typically accounts for about 30 percent of their output.

Because of this share of natural gas production in total production, oil producers saw low cash flows earlier this year despite rising crude oil production.

Exxon, for example, reported disappointing first-quarter earnings that fell short of consensus estimates due to lower natural gas prices, refining margins and non-cash adjustments. The annual decline in earnings was the result of industry refining margins and natural gas prices falling from last year’s highs to trade in a 10-year historic range.

Exxon’s upstream earnings fell $955 million from Q1 2023 “due to a 32% decline in natural gas realizations and other primarily non-cash impacts of tax and inventory adjustments such as and from divestments,” the supermajor said in April.

At Chevron, “Earnings for the first quarter of 2024 decreased compared to last year, primarily due to lower margins on refined product sales and lower natural gas realizations, partially offset by higher upstream sales volumes in the U.S. ,” said the other American supermajor.

Weaker natural gas prices and performance continued to be a drag on Chevron’s Q2 earnings. Chevron posted second-quarter earnings below analysts’ expectations, weighed down by lower refining margins and weak natural gas prices, as it announced the move of its headquarters from San Ramon, California, to Houston, Texas.

Exxon’s record oil production in the Permian and offshore Guyana more than offset weak natural gas prices in the second quarter.

Upstream, higher crude oil realizations and structural cost savings offset lower natural gas prices, higher expenses and lower base volumes due to divestments of non-strategic assets and government cutbacks, Exxon said.

The benchmark US natural gas price is currently trading around $2.60/MMBtu, but the futures curve suggests that prices could rise in 2025. Futures prices indicate that next year US natural gas prices could in average 44% higher than in 2024, which, if it materializes, would be the steepest increase in American natural gas prices since 2022.

By Tsvetana Paraskova for Oilprice.com

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