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Appalachian shale drillers catching '17 gas price wave, but a few still paddling

In a sharp contrast to the end of 2015, the nation's leading independent natural gas producers, led by Appalachian drillers, have loaded up on hedges at $3/Mcf and above to capture the full value of a healthier-looking NYMEX forward curve.

The lack of hedging a year ago worried the credit analysts at S&P Global Ratings, who said cash flow would shrink even further and toss more E&Ps into hot water with their creditors. "Hedges represent 8% ... of total expected oil and gas production in 2016, a marked decline from the 15% hedged last year," S&P said around this time in 2015. "The trend continues for speculative-grade companies, which have just 29% ... of total oil and gas production hedged next year compared with 45% in 2015."

Realizing that the party was over, independent E&Ps sobered up, stacked some rigs and began to live within their cash flows. Over the fall, they took a lesson from the previous winter, when gas sold for less than $2/MMBtu and ladled those hedges back on. The move renewed their own confidence, and that of investors, in the healing powers of selling natural gas for a profit.

"Having heard a number of E&P operators talk about hedging gas with a 3-handle [$3 to $3.99 per MMBtu] on [Henry Hub] on Q3 earnings calls, this recent run-up is a great opportunity for E&Ps to add incremental gas hedges," analysts at Tudor Pickering Holt & Co. said Dec. 13. "Prime example with [Comstock Resources Inc.] announcing incremental hedges to 50 Bcf of 2017 gas hedged at $3.32/Mcf (64% of gas at the midpoint of guidance vs. 16% just one month ago). Expect for more names in our gassy coverage to follow suit in the coming weeks."

The biggest difference year over year came from the big dogs of shale gas, Chesapeake Energy Corp. and Southwestern Energy Co. Southwestern had no 2016 production hedged heading into the year, while Chesapeake protected only 26% of its predicted production.

With the strip averaging $3.275/MMBtu for the full year 2017, Chesapeake and Southwestern have more than half their estimated production volumes hedged at $3/Mcf and above, according to an S&P Global Market Intelligence analysis.

In 2015, when the futures strip showed prices near $2/MMBtu for the first half of the next year, producers complained that there was little point in spending the money to hedge at what one called "punitive" prices.

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Most big pure-play Appalachian drillers need to beat frequent sub-$1/Mcf spot prices inside the play, and some have large chunks of their expected 2017 production hedged above the $3.275/MMBtu NYMEX curve, which should improve their margins and cash flows, given how low the group has driven costs.

The one exception is Cabot Oil & Gas Corp., which reported zero hedging at this time in 2015 and only 11% of production hedged currently. Cabot's first-quarter revenue took a beating without the hedge protection, as it reported averaging $1.49/Mcf for its production. Cabot soldiered on because its cash costs to operate were $1.18/Mcf in the quarter.

Outside Appalachia, Devon Energy Corp. CEO David Hager told analysts on Devon's Nov. 2 earnings conference call that the company was layering in more hedges. "We've been hedging significantly more, so that's helped underpin and provide more comfort to the cash flows that we'll have in 2017, but the opportunities are there to add more hedges and more rigs if prices go high enough."

Devon had 29% of its 2017 gas production hedged at $2.98/Mcf, according to its most recent earnings report.

S&P Global Market Intelligence looked at the hedging portfolios of the top 10 independent publicly traded natural gas producers in the U.S. Not included in that list are the supermajors, which normally do not hedge, and international oil and gas companies.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.