By ERIN AILWORTH
Oct. 22, 2014 12:53 p.m. ET
Drillers for Pennsylvania’s natural gas are facing a growing threat—from their own productivity.
Hydraulic fracturing and other new drilling techniques have caused the amount of natural gas flowing out of the state’s Marcellus Shale to soar in recent years. Production is expected to hit 16 billion cubic feet a day next month, nearly double what it was two years ago, according to a federal-government estimate.
The fracking surge has overwhelmed pipelines, creating a local glut that has caused gas prices to crater and forced drillers to re-evaluate operations. The situation became more pressing this summer, when federal regulators delayed construction of a pipeline meant to help producers move more gas by the end of next year. Some analysts say they don’t expect enough new pipeline capacity to be available until 2017.
“The Marcellus has blown up,” says David Tameron, a senior analyst in Colorado with Wells Fargo Securities LLC. Pipelines “just can’t keep up.”
Natural gas in the Marcellus traded as low as $1.44 per million British thermal units in recent days, less than half the U.S. benchmark price, which has hovered around $4. The discount is good for manufacturers and consumers around Pennsylvania but is hurting producers.
Among the hardest hit has been Cabot Oil and Gas Corp. of Houston, one of the largest producers in the Marcellus, the stock of which has dropped 19% this year. The company has some of the most productive wells but some of the worst access to pipelines, analysts say, and investors are questioning whether Cabot can ship all the gas it plans to drill for in the next few years at a decent price.
While the company remains profitable, Cabot Chief Executive Dan Dinges acknowledges that past performance was better and that investors expect more. “I think most would agree that we have moved sideways a little bit, run in place,” he said at an industry conference recently.
‘Why would you invest in something where you are only going to get a 5% return when you can invest in something where you get an 80% return?’
—Kelly L. Whitley, Ultra Petroleum Corp.
Cabot posted $225 million in net on sales of $1 billion for the first half. But the price it received for gas fell nearly 7% in the second quarter from a year earlier. The company says it is pushing to complete its pipeline projects in the Marcellus so it can sell more gas but also is shifting some investments to gas fields outside Pennsylvania. Cabot last month said it would purchase 30,000 additional acres in the Eagle Ford Shale of Texas for $210 million.
Pipeline companies don’t have a “build it and they will come” mentality, says Don Santa, president of the Interstate Natural Gas Association of America, a trade group in Washington. Pipelines are expensive to construct and subject to federal regulation, so companies won’t start a project without firm contracts from drillers. But producers are reluctant to make such commitments until they see how wells perform.
The problem has grown so acute that about 1,750 good Pennsylvania wells aren’t producing gas because they lack a pipeline connection, according to a Pennsylvania State University study.
Houston-based Ultra Petroleum Corp. recently traded 155,000 acres in Pennsylvania—and paid $925 million—to Royal Dutch Shell PLC in exchange for assets in Wyoming, where gas is selling for nearly double the price of Marcellus-pumped fuel.
“Why would you invest in something where you are only going to get a 5% return when you can invest in something where you get an 80% return?” says Kelly L. Whitley, Ultra’s director of investor relations.
Shell says it was motivated by attractive exploration acreage in Pennsylvania and that the company’s size gives it leeway to invest for the long term.
Chesapeake Energy Corp. of Oklahoma City also has moved capital to the Eagle Ford. And Houston-based Carrizo Oil and Gas Inc. has throttled back on gas output and postponed completing new wells until prices improve.
The Constitution pipeline, a 120-mile-long stretch being built by Cabot, Williams Partners LP of Tulsa, Okla., and others, will connect the Marcellus to New York and New England. Cabot expects the pipeline to begin operation late next year, but analysts say a delay in federal approval is likely to push that back to 2016.
Williams has several other pipeline projects in the works that would expand and reroute gas shipments to increase its ability to move Pennsylvania gas on its Transco network, which runs from Texas to New York. The network carries 10% of the country’s gas.
Houston-based Spectra Energy Corp. , a pipeline builder, has more than a half-dozen projects to transport Marcellus gas. And Kinder Morgan Energy Partners LP is expanding its Tennessee Gas Pipeline system in the Northeast, including a project that would require laying 125 miles of new pipe across Massachusetts. The company says it expects that line will be in service by late 2018.
Meanwhile, producers should expect to contend with low prices, says Matt Woodson, a Houston analyst at consulting firm Wood Mackenzie. “The Marcellus has exceeded expectations and so this is kind of the downside of that,” he says. “Where’s the gas going to go?”
Write to Erin Ailworth at Erin.Ailworth@wsj.com