Home Book trading U.S. natural gas producers face billions in coverage losses in 2022

U.S. natural gas producers face billions in coverage losses in 2022

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U.S. gas producers are expected to record billions of dollars in hedging losses next year, as they hedged most of their 2022 production before the recent energy crisis caused gas prices to spike, analysis reveals by Rystad Energy.

The analysis focuses on a peer group of producers focused on shale gas that accounts for 35% of unconventional gas production and about 53% of shale gas production in the land region of the United States this year. These 11 operators stand to lose more than $ 5 billion in 2022 if the average Henry Hub price range remains at $ 4 per MMBtu – an amount that could double if Henry Hub prices average $ 5 per MMBtu.

The reason for the expected losses is that operators had already hedged more than half of their 2022 production by the time they released their second quarter results, as prices were trading well below currently inflated levels. By the end of September, up to 64% of their projected production was covered.

To complete the picture and look beyond our research group, narrowly oil-focused producers tend to cover a lower share of their associated gas production than our peer group of gas-focused public producers. The coverage profiles of private operators focused on shale gas vary widely, but on average, they behave in accordance with the peer group studied. Gas producers focused on cash flow from Proven Developed Production Resources (PDPs) in conventional fields tend to cover only a limited portion of their production. Yet some have a high percentage of fixed price sales with deliveries to local markets.

In terms of total volumes, the associated gas contracts of public producers focused on tight reservoir oil would be about 50% lower than those of the shale gas-focused peer group. Still, their typical coverage floor is a bit higher based on their third quarter earnings. For private operators, visibility is less, but large private names in Haynesville tend to cover up well in advance, indicating low coverage floors.

“Given that the entire band for 2022 currently remains above $ 4 per MMBtu – although a strong pullback is present in the shape of the curve – the current state of the programs is likely to impose a Significant downward pressure on the cash flow of gas producer companies year after year, ”says Artem Abramov, head of shale research at Rystad Energy.

In the peer group

The share of production covered for 2022 varies from 10 to 11% for Coterra to almost 95% for CNX Resources. However, Coterra and CNX are clearly outliers, as the rest of the group’s share of hedged production is in a narrow range of 45-75%. The weighted average floor price ranges between $ 2.5 and $ 3.1 per MMBtu in Henry Hub terms. At these prices, we anticipate a strong impact of the recent improvement of the Henry Hub strip on floor prices when operators publish their annual results. At least two operators are among those who added hedges for 2022 who recently saw big gains in the average floor price: Range Resources raised the average floor by $ 0.30 per MMBtu, while Chesapeake raised its floor weighted average of $ 0.20 per MMBtu between the two. quarterly disclosures.

The significant increase in covered volume since Q2 2021 is mainly due to a handful of operators – Southwestern, Chesapeake, Range and Comstock. The inclusion of Cimarex Energy, as part of Coterra Energy, also increased the total. The new entity inherited the natural gas hedges from Cimarex because Cabot alone had no derivative positions for 2022 in the second quarter. In addition, key operator EQT Corp. has apparently ended some of its low-floor hedging positions for 2022 over the past few months.

Rystad Energy estimates that an average Henry Hub price of $ 4 per MMBtu in 2022 will result in a total loss of hedge of $ 5.2 billion on gas derivative contracts alone for the 11 companies analyzed. For context, the peer group is expected to generate approximately $ 48 billion in pre-hedged gross hydrocarbon sales before royalties, and approximately $ 21 billion in upstream operating cash in 2022, before accounting for losses of blanket. The coverage of losses at a strip of $ 4 per MMBtu will therefore be equivalent to more than 10% of the group’s pre-hedged income and will represent more than 25% of the cash flow from upstream operations. If the Henry Hub’s price averages $ 5 per MMBtu next year, the hedge losses for gas counterparts will almost double – to $ 9.8 billion. These growers will need a Henry Hub price of $ 2.4 or less to see significant coverage gains of over $ 1 billion.

By Rystad Energy

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