Analysis: Stronger Henry Hub forward prices push up returns in major US dry gas plays

Denver — The Henry Hub 12-month forward curve has increased by more than 40 cents over the last month to $2.88/MMBtu, propelling multiple gas plays to boast internal rates of return per well above 10%. Approaching winter demand could push the curve even higher despite elevated US storage levels.

IRRs in major gas plays, including the Haynesville, the Marcellus Dry and the Utica Dry, rose above 10% for the month of August, according to data by S&P Global Platts Analytics. Platts Analytics' IRRs are based on a half-cycle, after-tax analysis, which excludes sunk costs such as acreage acquisition, seismic activity and appraisal drilling.

While this is the first month higher Henry Hub prices are readily apparent in the 12-month forward curve, there are expectations for further price increases moving into the first quarter of next year where Platts Analytics forecasts Henry Hub to exceed $3/MMBtu.

This is expected to occur despite US natural gas in storage standing at 15% above the five-year average, according to the US Energy Information Administration data. The increased demand in the winter due to colder weather as well as a loss of associated gas production in oil-rich plays will likely drive the uptick in natural gas prices.

While operators among the oil plays are expected to proceed with caution, drilling activity in the dry gas plays like the Haynesville have seen a noticeable increase. Improved natural gas prices incentivize operators in the Haynesville due to the fact it has next-to-no differential from Henry Hub benchmark prices due to its geographic location.

This trend of increased activity in the Haynesville is expected to become more pronounced moving forward assuming natural gas prices continue to improve, and the Haynesville keeps displaying strong wellhead results.

In August, US drilling activity remained stable around 290 active rigs, according to data by Enverus. This is the second consecutive month the rig count has held flat. This supports the idea drilling activity has already bottomed out and should continue to remain steady assuming no major deviation from the current commodity price forecasts.

An interesting trend has been observed in regard to how rigs have fluctuated over the last month. While the Permian is the most active basin and rightly so due to its returns, it actually lost rigs during the month. This is because many of the other basins bottomed out over a month ago, but the Permian is one of the few basins which has not yet reached bottom due to such a high initial rig count.

The total rig count did not vary this month due to some rig gains in less active oil basins and major gas plays such as the Haynesville, which offset the losses in the Permian. This trend may continue given Platts Analytics forecast for improving natural gas prices and marginal oil prices over the coming 12 months.