Gas-weighted North American operators faced extreme price volatility in 2022. Panic over gas shortages in Europe leading into winter due to the war in Ukraine drove North American natural gas prices to levels not seen since the early 2000s.

NYMEX gas prices climbed from C$5.96/mcf in the first quarter of 2022 to peak at C$10.73/mcf in the third quarter before retreating to C$8.51/mcf in the final quarter of the year. Prices averaged C$8.74 mcf/d for the year.

“It’s important to note gas prices were relatively high before the beginning of the conflict. It just added to supply stress resulting from limited capital investment in 2020-2021,” said Mark Young, senior analyst for Evaluate Energy.

Going into 2023, gas supply has outstripped demand across North America. Average 2023 prices are forecast to be around half of 2022 levels, said Young.

“The impact of limiting Russian gas supply to Europe was lessened by a much warmer than expected winter on the continent, allowing it to rebuild storage. Demand centres in the eastern U.S. also had a mild winter, resulting in storage at the end of heating season far above five-year averages,” said Young. “Managing capital allocation in such a volatile market is challenging.”

Cash flow was up substantially in 2022 for the group of 38 North American gas weighted operators covered by Evaluate Energy because of the price surge. Operated cash flow was up 107 per cent when compared with the previous year. Capital expenditures jumped by $9.3 billion to reach $25.2 billion for the year. Free cash flow climbed 164 per cent.

U.S operators fared slightly better than their Canadian counterparts in 2022. The 15 gas-weighted U.S. operators reported a 112 per cent increase in operating cash flow compared to a 90 per cent increase for the 23 Canadian operators. Free cash flow was up 171 per cent for U.S. operators compared to 153 per cent to the Canadian group.

“Given current commodity prices we expect total operating cash flows and free cash flows to decline in 2023 but with over 60 per cent of gas production hedged coming out of 2022 the negative impact will be much less than the fall in prices,” said Young. “Many Canadian and U.S. Rockies operators are also delivering gas to the West Coast, where prices remain elevated compared to NYMEX.”

Capital Allocation

The overarching corporate narrative the last year has been about investing to keep production flat, paying down debt, and distributing the remaining free cash to shareholders through buybacks or dividends. But gas-weighted operators face a competing narrative saying they need to invest in supply with LNG exports increasing and global gas demand expected to climb long term, said Young.

“Repairing balance sheets and meeting shareholder expectations won out,” said Young. “While capital expenditures climbed the money was largely spent adding production through depleting drilling inventories to take advantage of high prices with little addition to future supply.”

Shareholders were the biggest beneficiaries. Around $22.5 billion was returned to shareholders through dividends and buybacks, up from only $3.1 billion in 2021. U.S operators returned 38 per cent of free cash to shareholders in 2022, totaling $17.4 billion, compared with just nine per cent, or $2.1 billion, the previous year.

The 38 gas-weighted operators paid down $8.9 billion in net debt in 2022, up from $6.8 billion in 2021.

Canadian operators paid down $2.8 billion in net debt in 2022, compared with $3.3 billion in 2021, as many operators reached debt targets.

U.S. operators continued to focus on debt repayments, paying down $6.5 billion in net debt in 2022 compared with $3.5 billion the previous year.

Capital expenditures climbed by 58 per cent, reaching levels last seen in 2018. U.S. operators increased capital expenditures by 64 per cent, while their Canadian counterparts increased spending by 48 per cent.

“This is directly tied to market access through LNG export terminals,” said Young. “U.S. operators were able to increase investment to take advantage of soaring demand overseas. Canadian operators also took advantage of the higher price environment but remained tied to the North American market.”

Capital expenditures up, production up, but long-term inventory declining

Gas-weighted operators spent $25.2 billion in 2022 adding 900,000 boe/d of production.

Both Canadian and U.S. operators increased production by about 15 per cent.

Canadian operators spent C$7.1 billion in 2022, adding 200,000 boe/d of production. U.S. operators spent C$18.2 billion adding 700,000 boe/d of production.

Total proved reserves across all gas-weighted companies in the study increased by 1.2 billion boe, or a little under four per cent, to reach 31.8 billion boe. However, the reserve increase came from developed proved reserves. Undeveloped proved reserves remained flat at 12.7 billion boe.

Total proved reserves for the 18 Canadian weighted gas operators increased seven per cent to 7.4 billion boe. Proved producing reserves increased 9.6 per cent while proved undeveloped reserves increased 2.5 per cent.

U.S. operators reported a three per cent increase in total proved reserves, broken down into a six per cent increase of proved developed reserves and a one per cent decrease in proved undeveloped reserves.

“U.S. operators depleted existing drilling inventory to take advantage of the price spike by increasing production,” said Young. “Canadian operators did so as well but managed to add back inventory as evidenced by the increase in undeveloped proven reserves.”

Average reserve life index across all operators declined from 15.7 years to 14.3 years. The 18 Canadian operators reported an average 2022 reserve life index of 14.5 years. U.S. operators reported an average 2022 reserve life index of 14.2 years, down 1.4 years from 2021 levels.

With gas storage levels well above five-year averages in all regions but the West Coast of the U.S., North American natural gas prices aren’t expected to recover much from current levels for the remainder of the year, said Bemal Mehta, managing director of energy intelligence for geoLOGIC systems ltd.

“As always weather will impact prices and geopolitical risks remain elevated,” he added.