2021 Industry Outlook

Posted March 11, 2021

For many of us, 2020 was a challenging year. That goes for the oil & gas industry as well. COVID-19 threw development off schedule, contributed to a low-price environment, and created a lot of unpredictability.

So what will the coming year hold for the industry? Here’s how the previous year shifted the oil & gas landscape, and what you can expect to see in the months ahead.

Recapping 2020: How did we get here and where are we now?

Overall, 2020 was a down year in the oil & gas industry. There was record-low pricing throughout most of the year. The pandemic really hurt demand—not only for oil, but natural gas as well. LNG (liquified natural gas) was pretty much halted. Travel came to a standstill too, which affected oil prices.

The combination of record-low pricing and the pandemic resulted in the rig count decreasing in every basin from 50-70%—and in some cases even higher. With fewer rigs, there wasn’t nearly as much development as expected.

A lot of oil companies were distressed and their stock prices took big hits. The banks weren’t lending as much. The amount of capital these companies were planning on deploying for development at the start of last year completely changed as the year went on.

As the market corrects itself, prices will begin rising again

Moving into 2021, one good thing for the oil & gas industry is: Because the rig count has been so low and stayed that way, supply has dropped significantly across the board. That’s slowly starting to rebalance the gas market. Some recent snowstorms in the Northeast have also increased natural gas demand. The forward strip for natural gas looks pretty good.

The current administration could also help raise the price of natural gas because they’re going to regulate oil & gas drilling on federal land. That’s going to just leave development on private land. ​This won’t affect much in Ohio per se because they don’t drill a lot on public land already. But, historically, whenever there’s a Democratic administration, prices at the pump, natural gas prices, and oil prices all tend to go up because there’s more regulation and restrictions.

How mergers and acquisitions will impact development in the region

As a result of some mergers and acquisitions in the operator space, the industry got a little smaller in 2020. Southwestern acquired Montage and then Chevron sold its Appalachia assets to EQT. It was mostly companies that already had big positions in Appalachia just making their positions a little bit larger, or buying because it was a good time to buy.

How will these consolidations affect landowners receiving royalties or waiting to receive royalties? If your land has already been developed, it won’t have much impact—it’s just going to be a different operator paying you. But, if you’re still waiting for your land to be developed, these acquisitions could have either a positive or negative impact on your prospects.

For example, if you’re in a Chevron lease or a Chevron area and EQT acquired it that could be a good thing. Chevron is a massive company and they weren’t very active in Appalachia, whereas EQT’s main stronghold is Appalachia. So maybe they’re going to get to development sooner.

On the negative side, any time a company takes on more acreage it gives them more options of where to drill. ​Take Southwestern, for example. They already had a big position throughout the United States. They’re publicly traded and they took on more acreage in Southeast Ohio buying Montage. With a big acreage position, they’re going to drill where their dollar makes the most sense economically.

Expect natural gas production to pick up in the coming months

Another thing we saw in 2020—particularly during the summer months—was operators throttling back some wells to slow them down so they won’t produce as much gas. They do this because the price of natural gas is low and demand is also low because there is a surplus. The thinking is it’s better to wait until prices go up and demand rises to use that gas.

Usually operators don’t shut off the wells completely, they just slow down the rates—which can affect the royalties landowners receive. You’re going to see it on your royalty check. It’s going to be a significant decrease where not only are your prices dropping, but your volumes are dropping as well.

Across the board, most operators were throttling wells with the low-price environment in 2020. Moving further into 2021, hopefully we are going to be bringing that production back up because the price is getting a little bit better.

As the supply comes down and demand eventually picks back up, that will rebalance the gas, oil, and liquids markets. LNG is starting to really pick up again because they’re starting to export LNG to European countries and Asia—which is good long-term and another positive as we move into 2021. Hopefully late 2021, we’ll start seeing a lot more of that.

Why 2021 is a good time to consider selling your mineral rights or royalties

With prices rising, you may be able to capitalize on selling your minerals and get more bang for your buck than you could last year. It’s also important to remember that prices could go back down again at any time. In this industry, prices can fall in a heartbeat but it takes a while for them to go back up because the whole market has to be rebalanced.

Another important consideration is that taxes are likely going up under this administration. By selling now you can lock in the current capital gain tax rate—which is pretty low. If you have a big interest, locking in that capital gain this year could be a smart move. Next year, if that rate goes up, that will change things for your capital gain, taking more money out of your pocket.

Interested in finding out what your mineral rights or royalties are worth? Contact the experts at Gateway Royalty today. We’ll evaluate your land, lease, and geology, and let you know your value.

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