NEW YORK - New pipelines in Appalachia should improve pricing for gas producers in the region over the next two years, but the gains won't likely lead to a big jump in drilling beyondcurrent levels, says a report published by S&P Global Ratings on June 25, 2018. Exploration and production (E&P) companies already forecast healthyproduction growth while spending largely within cash flow, and expansion thatrequires borrowing is likely to be poorly received by investors, according tothe report "Appalachia's Natural Gas Drillers May Ride New Northeast PipelinesTo Higher Profits." Natural gas producers in the region will require prices ofmore than $3 per mmBtu even with improved differentials before they'remotivated to grow at a faster pace.

"E&P companies targeting the prolific Marcellus and Utica shales have turned Appalachia into the biggest natural-gas-producing region in the U.S., changing market dynamics and helping transform the country from a net gas importer to exporter," said S&P Global Ratings credit analyst Ben Tsocanos. "The huge jump in output over the past several years outpaced infrastructure development, resulting in bottlenecks that produced big price discounts, stifling E&P companies' profitability." 

S&P Global Ratings believes these recent developments will narrow the negative differential, improving profitability for gas producers in the region over the next two years. However, it's not likely E&P companies will ramp up drilling due to investor focus on returns over growth.