Big US gas drillers have 50% of H2 2023 production hedged at $3.35/Mcf

 26 Sep, 2023  spglobal.com

Large US shale drillers have hedged 50% of their anticipated natural gas production for the second half of 2023 at an average price of $3.35/Mcf, well above the NYMEX curve, according to an S&P Global Commodity Insights report.

The nine drillers comprising Commodity Insights' peer group of large North American gas-focused exploration and production companies are also buying more price protection in 2024, the researchers said, in anticipation of a further rise in gas prices. All nine are based in the US.

Hedges contributed $924 million to the peer group members' cash flow in the second quarter because the benchmark NYMEX Henry Hub gas futures prices were closer to $2/Mcf than the $3/Mcf-plus strike price of hedges most producers bought, the Commodity Insights upstream analysts said.

The banks that sold the contracts — most frequently, swaps — have to make up the difference between the strike price and the lower NYMEX price.

Prices are expected to move higher in 2024, and gas drillers are still locking in price protection, analysts Travis Williams and Thomas Wilson said in their report on oil and gas hedging through the second quarter of 2023.

"With the 2024 strip averaging $3.58/Mcf by the end of the second quarter, there was an uptick in hedging activity to 24% of forecast production," the analysts said. For 2024, the gas group has 30% of production hedged at $3.56/Mcf, the Sept. 21 report said.

The NYMEX contract had a Sept. 25 preliminary settlement price of $2.639/MMBtu for the October contract, which is set to roll off the board. The succeeding November contract had a preliminary settlement of $2.906/MMBtu on Sept. 25.

"We believe that these elevated prices could continue to entice operators to lock in hedges for 2024, as their hedges have proven beneficial to the group, similar to the second quarter, when realized derivatives bolstered cash flow," the analysts said.

Seven of the nine large North American gas-focused E&Ps added 2024 natural gas hedges by the end of the second quarter, the note said, with five of the nine adding to their 2025 hedge portfolios. Still, gas producers are hedging less than they have in the past, according to Commodity Insights data.

"The large North American gas-focused E&P peer group remained markedly underhedged at 50% versus the five-year median of 69%," Commodity Insights said.

Among the larger group of oil and gas independents, a higher percentage of gas production was hedged compared to crude oil, the researchers said, with fewer gas hedges for 2023 and 2024 than the historical trend.

"Companies continued to hold off on adding meaningful new hedge positions for 2023," the upstream analysts said.

Marcellus Shale driller CNX Resources Corp. has more of its second-half production hedged than any other company in its peer group, with 80% hedged at an average price of $3.04/Mcf. With the lowest percentage of the group, West Virginia operator Antero Resources Corp. had the least amount of production hedged for 2023, 4% at $2.42/Mcf.

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