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Top shale gas drillers starting 2017 with stronger protection against low prices

The largest independent gas producers in the U.S. have much more of their 2017 production hedged against prices below $3/MMBtu, an S&P Global Market Intelligence analysis of company financial reports found.

Nine of the nation's 10 biggest independent drillers increased the proportion of expected production that is hedged relative to 2016, and both drillers that had little or no production volumes hedged in early 2016 decided to buy protection against 2017 gas prices for most of their expected production. Southwestern Energy Co., for example, had 4% of its expected 2016 sales hedged by year-end 2015. As of Feb. 21, Southwestern had layered on enough hedges to protect 69% of its expected 2017 production volumes at an average price of $3.02/Mcf.

Many major gas U.S. producers, predominately supermajors such as the top U.S. producer, Exxon Mobil Corp., do not hedge at all, while others are loath to spend the money to hedge protection because it caps their ability to get higher prices when the commodities market spikes in winter and summer. Appalachian producers, which routinely see spot prices $1/MMBtu lower than the benchmark Henry Hub, have historically been ready to protect their revenue by hedging.

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Marcellus and Utica shale producer Antero Resources Corp. has been the poster child for defensive hedging, with contracts protecting all or nearly all of its production several years out at better prices than the Henry Hub. In 2016, Antero had 100% of its production hedged at $3.92/MMBtu. For 2017, it has 100% of its volumes hedged at $3.63/MMBtu. For 2018, it expects to have 100% of production hedged at $3.91/MMBtu.

Before a warm winter could cap what had been the steady move toward higher gas prices, analysts were hoping exploration and production companies would lock the pre-winter price move above $3/MMBtu. "Expect hedging to accelerate as it finally doesn't hurt to hedge," analysts at Tudor Pickering Holt & Co. said Jan. 10. "With strip +10% since the end of Q3 and positive tailwinds building from a macro perspective, it will be interesting to see how E&Ps have positioned themselves from a hedging standpoint for '17."

"Given the recent volatility of the '17 [Henry Hub] (has ranged from less than $3/Mcf to greater than $3.50/Mcf since the end of Q3'16), timing becomes important as we expect operators to continue to opportunistically layer on gas hedges," the analysts said.

According to a March 27 report by the oil and gas consultants at Wood Mackenzie, E&Ps were laying on hedges earlier than the fourth quarter of 2016. They observed that fourth-quarter purchases of hedging contracts were subdued "because producers already held healthy positions for 2017."

"Predictably, the biggest gas players accounted for most activity: Southwestern, [Encana Corp.], [Range Resources Corp.] and [Chesapeake Energy Corp.] accounted for 62% of new volumes added," Wood Mackenzie research analyst Andy McConn said. Chesapeake is now 73% hedged at $3.07/Mcf as of its Feb. 23 guidance update.

"At this early stage of the year, the peer group already has a higher proportion of its liquids production hedged than the prior two years with 26% in 2017 versus 24% and 23% in 2016 and 2015, respectively. The same is true for gas with 42% in 2017 versus 32% and 28% in 2016," McConn said.

Cabot Oil & Gas Corp., with nearly all of its gas production coming from Susquehanna County in northeast Pennsylvania, has said it will not sign hedge contracts at prices it considers punitive, and only 11% of its 2017 volumes are hedged, at an average price $3.11/Mcf. On the other hand, Cabot has 36% of its production inked to fixed-price contracts, primarily to power plants in Pennsylvania, at $2.29/Mcf, the company said in its most recent quarterly report. Cabot has the lowest cash costs of any Appalachian producer at $1.01/Mcf in 2016.