BLBG: Hedging Gas Tumbles to 30% of Production as Prices Slump: Energy Markets
Natural gas companies are slashing their hedging of future output as prices tumble, raising the prospect of declines in drilling and production.
About 30 percent of next year’s gas has been hedged, down from approximately 50 percent this year, according to analysts at Canaccord Genuity, RBC Capital Markets and Raymond James. Gas fell 27 percent so far in 2010 and settled at $4.048 per million British thermal units yesterday on the New York Mercantile Exchange, the lowest level in nine years for this time of year.
Southwestern Energy Co., the largest gas producer in the Fayetteville shale of Arkansas, has so far sold a lower percentage of futures and swaps for 2011 production than for 2010. The drop in the availability of insurance suggests speculators don’t expect an increase in gas next year and leaves companies vulnerable to price fluctuations.
“If producers are not able to hedge at attractive levels, they will be selling more gas at spot prices, and if spot prices remain depressed, that will leave less capital for drilling in the following year,” said Biliana Pehlivanova, an analyst at Barclays Capital in New York.
Benchmark gas at the Henry Hub in Erath, Louisiana, will average $4.33 per million Btu next year, down from this year’s estimated average of $4.37, according to a U.S. Energy Department report on Dec. 7. Prices have declined as increasing production of shale gas, which is extracted from onshore rock formations, boosted stockpiles to a record 3.843 trillion cubic feet for the week ended Nov. 12.
2010 Forecast
Output will average 62.09 billion cubic feet a day this year, the highest level ever, according to the Energy Department. The number of U.S. gas drilling rigs fell by 13 to 948 in the week ended Dec. 10, according to Baker Hughes Inc. The rig total is up 25 percent from a year ago.
Producers have hedged about 32 percent of 2011 production at an average price of $5.80 per million Btu, down from 52 percent at $6.50 for 2010, said Cameron Horwitz, an analyst in Houston at Canaccord Genuity.
“Lower levels of hedging force producers to set their budgets based on returns that are more commensurate with the current gas price environment,” Horwitz said.
Gas producers’ net-short positions in futures and options combined in four gas contracts declined to 485,180 futures equivalents in the week of Dec. 7, down 24 percent from a peak in May and the lowest level this year, according to the Commodity Futures Trading Commission’s Commitments of Traders report released Dec. 10. Producers sell futures to secure prices for output from their wells.
Four Contracts
The measure of natural-gas positions includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps, and ICE Henry Hub Swaps.
Houston-based Southwestern Energy has about 129 billion cubic feet, or 27 percent, of its 2011 expected gas production hedged at an average price of $5.43 per million Btu, compared with 121.2 billion, or 30 percent, for 2010, the company said yesterday in a statement. The company sold forward about 40 billion cubic feet of the fuel at $5 in the past month.
The company also said it will reduce capital investment to $1.9 billion for 2011 from $2.1 billion in 2010.
The 2011 gas calendar strip, or the average price of 12 months of futures contracts, was $4.2526 per million Btu yesterday, down from $6.3361 at the beginning of the year.
Selling Forward
Gas companies are reluctant to sell forward with prices so low and are “entering 2011 with less downside protection to weaker gas prices,” analysts including Marshall Adkins at St. Petersburg, Florida-based Raymond James said in a report on Dec. 6. Producers have covered 34 percent of 2011 output, compared with 50 percent in 2010, according to the firm’s analysis of 41 companies.
Scott Hanold, an analyst with RBC Capital Markets in Minneapolis, says producers have sold forward about 35 percent of their 2011 output, down from about 50 percent for 2010.
Cimarex Energy Co., a Denver-based independent oil and gas company, said it hasn’t sold forward at all.
“In terms of gas for 2011, you can basically think of us as unhedged for next year,” Paul Korus, chief financial officer of Cimarex, said in a presentation on Nov. 18.
EOG Resources Inc., a Houston-based gas producer, said it has about 150 million cubic feet per day of 2011’s output hedged at $5.44, down from 646 million hedged for 2009.
“We are not well hedged at this point for 2011,” said Loren Leiker, vice president of EOG, at a presentation on Nov. 11. The company is “hoping for a better opportunity to ratchet that number up.”
To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Christine Buurma in New York at cbuurma1@bloomberg.net
To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net
