Northeast Pennsylvania E&P Pain Could Be Power Plants' Gain

| About: Cabot Oil (COG)

Summary

US power burn is up 1.3 Bcf/d summer 2016 vs. 2015.

Northeast Pennsylvania E&Ps, such as Cabot Oil & Gas, are inking power plant supply deals to grow production as pipeline expansion process faces headwinds.

For macro US gas balance, new, more efficient combined cycle gas power plants may displace less efficient gas plants, resulting in lower burn per megawatt produced.

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BTU Analytics wrote a blog on Northeast Pennsylvania production, pipeline expansions and power plants back in November 2015, highlighting concerns about pipeline delays crimping Northeast Pennsylvania E&Ps' ability to grow production while power plants in the producing area would provide some reprieve. Looking back now, our concerns about Constitution Pipeline were valid, as that project is now in pipeline purgatory, under indefinite environmental review, compliments of New York Governor Cuomo's administration.

However, there is some good news out there for Marcellus producers. If we take a step back and look at the macro U.S. gas market and the impact of coal retirements, combined-cycle natural gas power plant development and relatively low gas prices we can see that overall the U.S. power burn sample summer-to-date is up 1.3 Bcf/d summer 2016 vs. summer 2015, despite what so far has not been a hot summer (see slide below).

One of the tailwinds in this story is large new gas-fired power plants coming online as is the case with the Panda Energy Patriot plant located in Lycoming County PA. This plant started receiving gas off of Transco on June 21, 2016 and has been burning 98 MMcf/d over the last week as shown below.

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Cabot Oil & Gas (NYSE:COG) which was planning on using Constitution Pipeline capacity to grow production has turned to other avenues to grow production including doing deals with power plants in the supply area. Cabot announced on July 5, 2016 that it had recently inked a deal to supply natural gas under a long-term sales agreement to the 1,480 MW Lackawanna Energy Center located in Lackawanna County, PA, as shown below.

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The PJM generation queue shows 18 natural gas plants under construction in Pennsylvania with a total of 9,690 MW of new capacity. Some of these plants, such as Sunbury and Good Spring, are currently located a good distance from existing intrastate pipelines however new pipeline expansions in the form of UGI's Sunbury pipeline and William's Atlantic Sunrise will provide supply to these plants once the projects are in service.

If long-haul Northeast pipeline expansions continue to face regulatory headwinds, supplying local power plants may be the best way for Northeast Pennsylvania E&Ps to grow production in the interim. The one fly in the ointment for the macro U.S. natural gas balance may be new combined-cycle natural gas-fired power plants with lower heat rates may displace high-heat-rate gas combustion turbines and old gas cogeneration, resulting in more megawatts produced using less gas burn.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.