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Appalachian producers see fundamentals shaping stronger natural gas prices

Highlights

Exports up significantly year over year

Operators hedge heavily to make up for weak differentials

Houston — Appalachian producers expect stronger year-over-year returns in 2021 based on a sizable percentage of hedged volumes, higher prices, increased export and LNG demand and the completion of an expansion project in the fourth quarter.

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Several interlocking factors look to produce stronger US natural gas prices in 2021.

"As maintenances begin, we expect a much more bullish summer and winter outlook than what we experienced last year," said Cabot Oil and Gas CEO Dan O. Dinges, during the company's Q1 2021 earnings call on April 30. "US LNG exports are currently averaging over 11 Bcf/d, more than 3 Bcf/d over last year. Mexican exports are up to 7 Bcf/d or 2 Bcf/d over this time last year."

Global LNG loadings remain robust, up 3.3% year on year, with a strong pricing environment incentivizing all marginal supply into the market, as exhibited through the significant growth in exports seen out of the US and Egypt, according to S&P Global Platts Analytics.

Despite higher demand and stronger prices, many operators continue to maintain steady drilling and completion activity rather than jumping production in response to short-term price gains.

"On the supply side we continue to see capital discipline across US basins, including Appalachia," Dinges added. "Lower 48 natural gas production is 1.5 Bcf/d below this time last year and storage volumes are more than 300 Bcf below this time last year. This deficit is expected to rise in the next few weeks. End-of-October levels should also be well below last year, setting up a more bullish winter. Natural gas futures are up year over year."

The Leidy expansion project, expected to enter service late 2021, looks to add a substantial amount of takeaway capacity from the region.

"Leidy adds 580 MMcf/d of new takeaway capacity from the basin," Dinges said. "It is expected to enter service in December 2021."

"We are disappointed about the May blowout due to the project, but it also prevents any gas from going into Leidy storage fields during May," added Jeffrey Hutton, Cabot's senior vice president of marketing. "The lower supply increases our expectations for stronger summer prices."

Appalachian producers are also leaning heavily on hedging to shield themselves from market volatility. Southwestern Energy reported during its first quarter earnings on April 30 that approximately 80% of annual natural gas production is protected from impacts of widening Appalachia differentials through transportation capacity and basis hedges.

A survey by Platts Analytics found 64% of 2021 US gas production is hedged at an average price of $2.73/MMBtu, and at an even higher percentage for gas-focused producers. The 10 top US gas producers hedged about 73% of expected production at an average price of $2.74/MMBtu, a minor increase in 2021 hedge volume and average price from the prior quarter.

With 2021 gas hedge portfolios largely built out, only minor additions are anticipated through the rest of 2021 as gas producers instead turn their focus to developing their 2022 hedge strategies. Antero, Seneca and Southwestern are among those which have added the most hedges for 2022, with an estimated 50% or more of production hedged.