Expand Energy

Iran-backed Houthi rebels have taken control of the Bab al-Mandeb strait, according to several news reports. Also, last week, drone attacks damaged the critical East-West pipeline, forcing Saudi Arabia to shut it down.

Why it matters: The Bab al-Mandeb Strait is another critical Middle Eastern maritime chokepoint, aside from the Strait of Hormuz, while the East-West pipeline is a critical artery that crosses Saudi Arabia and connects it to the Red Sea. Saudi Arabia used both as a workaround to the current crisis. Before the war, roughly 4%-7% of global liquids moved through Bab el-Mandeb, though EIA estimates have shown that figure rose during the second quarter. Houthi control of this strait disrupts one of the world's major suppliers and heightens the risk of escalation. While we previously flagged that recovery was quicker than expected following the now-failed earlier Memorandum of Understanding between the US and Iran, we now believe something akin to our prior bear case scenario is more likely and that the disruption of flows will persist into 2027.

The bottom line: We aren't changing our $65 per barrel Brent midcycle oil price estimate, as stated in real terms, but we're far more concerned about near-term supply disruptions than we were previously. While Saudi Arabia can keep loading crude, it must rely on a thin storage cushion. How quickly flows normalize will depend on how fast Saudi Arabia can restore the pipeline. We've read that the country could partly restore the pipeline through one of its two lines, even as full repairs could take multiple weeks. But even so, Houthi control of the Red Sea will still hurt flows. We continue to model oil price futures in our next two-year assumptions as we have no edge over markets here. Long-term, however, we see greater opportunity in the gas supply chain in names such as Expand, Antero, and Baker Hughes, particularly as cheap Permian supply hurts gas companies.

We increased our fair value estimate to $144 per share from $99 after increasing our assumed Henry Hub midcycle natural gas price to $3.70/mcf from $3.30/mcf. Growing demand for natural gas in the US, particularly from LNG exports and power consumption, drove the increase to our outlook. We expect US natural gas demand to grow from 107 bcf/d to 148 bcf/d by 2035, which will require higher-cost marginal supply.

We assume oil (West Texas Intermediate) prices in 2026 and 2027 will average $81 and $72 per barrel, respectively. In the same periods, natural gas (Henry Hub) prices are expected to average $3.10 and $3.49 per thousand cubic feet. Terminal prices are defined by our long-term midcycle price estimates (currently $65/bbl Brent, $60/bbl WTI, and $3.70/mcf natural gas).

Our fair value estimate corresponds to enterprise value/EBITDA multiples of 6.3 times and 6.7 times for 2026 and 2027, respectively. Our production forecast for 2026 is 7,447 thousand cubic feet of natural gas equivalent per day (mmcfe/d), in line with management's guidance. That drives 2026 EBITDA to $5.9 billion, and we expect free cash flow to reach $3.2 billion in the same period. Our 2027 estimates for production, EBITDA, and free cash flow are approximately 7,435 mmcfe/d, $5.6 billion, and $2.4 billion, respectively.

(Sept. 17, 2026): A previous version said the fair value estimate decreased; it actually increased.

We assign Expand Energy a Morningstar Economic Moat Rating of none. Our assumed midcycle price of $3.70 per thousand cubic feet is insufficient to give us confidence that Expand could dependably return its cost of capital through the cycle. In upcycles, Expand generates substantial excess returns, but in downcycles, such as 2024, returns have gone negative.

For exploration and production firms, we assign moats based on the quality of acreage. High-quality acreage secures returns through the cycle by lowering breakeven per-molecule cost, allowing the producer to maintain or increase production without returns declining below the cost of capital, except in the most extreme cases. Of the oil producers who have moats, they produce returns in the low to midteens at midcycle prices.

Natural gas producers have an additional wrinkle with midstream capacity. Gas production is constrained by both demand and pipelines to deliver it to markets. It can only be moved economically in pipelines for overland travel. Without dedicated pipeline capacity to get volumes to demand markets, even prized acreage may be worth very little from a moat perspective.

We currently do not assign a moat to any natural gas producer. Seasonal demand, paired with insufficient pipeline capacity, leads to large price swings both day to day and location to location. Even for an Appalachian producer, discounts of 40% are not unheard of, as a cool summer or warm winter can drastically change demand on short cycles. Oil and NGLs are more easily transported and stored, suffering less from infrastructure and demand dislocation.

Additionally, natural gas-focused producers face competition from associated natural gas produced by oil-focused operations. Since gas is secondary, if even a concern, it is sold at deep discounts. In recent years, natural gas has had a negative value in the Permian. Natural gas production from mature oil basins will continue to rise even if oil production stays flat, as older wells produce more gas as they age. If supply ever outstrips demand, natural gas-focused producers will be the first to restrain production, limiting their ability to earn a cost advantage moat.

Expand operates in the Haynesville, northeast Appalachia, and southwest Appalachia. Haynesville and northeast Appalachia are characterized as dry, producing only natural gas and no liquids. Together, these accounted for 78% of total production in the first half of 2025. Southwest Appalachia produced the remainder and is responsible for all of the company's oil and natural gas liquids.

The Haynesville basin can be viewed as the gas station for US LNG production, benefiting from both proximity and favorable regulatory frameworks. Louisiana, home to both the Haynesville basin and a massive concentration of US LNG export capacity, has always been friendly to oil and gas development. For that reason, building new intrastate pipelines connecting the basin to the Gulf Coast has been far easier than building interstate pipelines that connect producing regions to traditional natural gas consumers, such as population and industrial centers. As LNG production ramps up in Louisiana through 2030, natural gas produced in the Haynesville may receive a consistent premium to US benchmarks. On the other hand, producers and pipeline developers in Texas, Louisiana’s neighbor and noted oil and gas producer, see the same opportunity. LNG producers have also been developing their own pipeline infrastructure to capture gas before it reaches the local hubs, attempting to secure a discount upstream. Given the attractiveness of the opportunity, the favorable regulatory environment, and the proximity to other producing fields, we expect any premium to be eroded eventually.

Appalachia, on the other hand, will likely continue to receive a discount. The web of jurisdictions for the basin has limited new pipeline development, causing acute pipeline tightness and contributing to wide differentials and flat production growth. Most major producers have entered maintenance capacity plans to prevent the worst of overproduction. There may be some easing of this pressure as the breakneck data center cycle has identified the region as ripe for development due to the ample power supply. Any in-basin demand will be more easily served by local infrastructure, subject to far fewer regulatory conditions. This demand can serve two purposes: providing a way to increase production without worsening the in-basin discount or narrowing the discount with a constrained production plan.

For both the Haynesville and Appalachian basins, Expand’s strategy is only to produce to its pipeline capacity and is limited by in-basin demand. To that end, it has invested in and is an anchor shipper on the new NG3 pipeline connecting the Haynesville to the Gulf Coast.

Shale oil and gas producers have historically struggled to respond quickly to changes in demand, despite being the shortest-cycle source of supply. Expand’s approach is two-pronged. It maintains drilling through the year, deferring the completion of wells. This helps it maintain a consistent number of rigs drilling through the year and only brings wells online during predictable periods of elevated demand, such as winter. Second, shale gas wells can have their production controlled by “choking” them. Essentially, restricting their flow enables reduced production in low-price environments without causing major issues to lifetime recovery.

The Haynesville footprint will benefit materially from LNG expansions because of its proximity.

New power and data center demand in Appalachia and the Southeast will provide new stable demand sources that Expand can capitalize on.

Natural gas pricing in the US has substantial room to grow as oil production and associated natural gas production stalls in the back half of the 2020s.

Natural gas producers compete with oil producers, who throw off low-cost gas. Associated gas production is expected to continue growing as oilfields age and new pipelines are developed.

New infrastructure connecting production to demand will naturally constrain natural gas price growth as producers seek to meet demand.

Ongoing elevated natural gas prices will erode demand, incentivizing the use of alternative power sources.