US natural gas producers have been increasing the share of gas volumes being hedged in 2023 as gas prices collapse and are expected to remain low through at least the end of the year.
Despite significant differences between producers in the overall share of gas being hedged in 2023, many upstream companies increased that share between the reporting of third and fourth quarter earnings. For EQT, the largest US gas producer by volume, that share increased from 62pc to 66pc; for Coterra Energy, from 8pc to 18pc; and for Antero Resources, from 4pc to 5pc, according to analysts at Rystad Energy.
Of the nine "peer" producers Rystad evaluates, all nine increased their share of hedged volume in the fourth quarter, up by an average of 5.7pc from the previous quarter.
The increase in hedged volumes is a reversal of the overall trend of the last year, in which producers, chastened by multibillion-dollar losses on derivatives, aimed to let their hedges expire and increase their exposure to the upside.
EQT, the largest gas producer in the US by volume, reported $4.6bn in losses on derivatives in 2022 and $3.8bn in 2021. This compares with a $400mn gain on derivatives in 2020, when the Covid-19 pandemic crushed demand and gas prices fell below the level at which EQT had locked in its sales.
In the 2020-2022 period, EQT lost about $8bn on derivatives.
Southwestern, similarly, lost about $7.5bn on derivatives in the 2020-2022 period, most of it in 2022.
Chesapeake lost about $3.6bn on derivatives in 2022.
The scale of the losses is especially striking in a year of record profits for many oil and gas companies. Despite EQT's $4.6bn derivatives loss in 2022, for example, EQT still netted $1.8bn for the year.
Hedging in an unpredictable market
Producers occurred substantial derivatives losses in 2021 as the gas market unexpectedly tightened on rising power demand, depleted inventories and coal plant retirements. These factors sent prices soaring, leaving producers who had locked in their prices earlier to miss out on the bull run.
Those derivatives losses accelerated in 2022 when Russia invaded Ukraine, causing a global energy crisis in which overseas appetite for US gas soared along with prices and remained elevated for much of the year.
At the same time that those derivatives losses were taking place, producers were paying off substantial portions of debt, freeing them from some loan covenants that mandated hedging as a form of insurance. Combined with increasing hedging losses, that debt reduction led producers to become significantly less hedged than they were in years' past.
But at the beginning of 2023, record-high gas production and historically mild winter weather sent prices plunging from their highest sustained level in more than a decade to their lowest in years.
Spot gas prices at the US benchmark Henry Hub in Louisiana are now expected to average $3.02/mmBtu in 2023 and $3.89/mmBtu in 2024, significantly down from the 2022 average of $6.42/mmBtu, the EIA said on Tuesday in its monthly Short-Term Energy Outlook.
With increased exposure to the downside, producers are now seeing less cash flow than expected, and are looking to hedge greater volumes in case prices remain low for a long time.
Unhedged producers are also more sensitive to low prices, meaning that more significant reductions in cash flow could cause producers to reduce production. But because rigs and fractionation crews operate under contract, low prices are unlikely to lead to immediate reductions in activity, said Matt Hagerty, senior energy strategy analyst at BTU Analytics.
"This is where they instead risk free cash flow (and therefore returns to shareholders) falling in the immediate near term if capex can't quickly be curtailed," Hagerty said.
