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Appalachia gas producers Antero, EQT, and CNX diverge on hedging strategies

Highlights

EQT, Antero bullish on gas pricing outlook

CNX Resources cautious of market volatility

Executives at three Appalachia natural gas producers Oct. 28 revealed three different takes on how to hedge for the uncertain market ahead.

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Regaining investment-grade ratings was a stated goal by executives at all three producers in third-quarter earnings calls, with maximizing free cash flows and paying down debt highlighted as key objectives for the next several years. Hedging programs were touted as the pathway to accomplish these balance-sheet goals.

Executives at Antero Resources and EQT were bullish about where prices are headed and structured their hedging programs to have more exposure to higher possible future prices. An executive at CNX Resources, however, expressed a more cautious view, given the market's past volatility and the possibility that even relatively minor shifts in the basin's production could substantially alter the pricing landscape.

The past several years have brought immense volatility to regional gas prices, with Appalachia benchmark Eastern Gas, South – formerly known as Dominion, South – trading above $5/MMBtu in recent trading sessions and falling as low as 52 cents/MMBtu last October.

The Eastern Gas, South forward curve shows strong pricing for remainder-of-winter 2021-22, with expected prices falling into the $3-$4/MMBtu range for 2022 and $2-$3/MMBtu for 2023.

Antero Resources

Antero Resources management team laid out a strategy to hedge 50% of 2022 production and to be "essentially unhedged in 2023 on all commodities and going forward," CEO Paul Rady said in his opening remarks.

"We're looking forward to being completely unhedged to take advantage, obviously, of the high prices, and that will accelerate our de-levering," Rady said.

Part of the company's comfort with greater exposure to the market and confidence in capturing higher prices can be attributed to its sizeable firm-transportation portfolio, which Rady said allows Antero to sell 100% of its production out of basin into more premium markets.

In light of a difficult legal and permitting environment for pipeline development in the Northeast, takeaway capacity remains a risk to Appalachia basis spreads should production increase at a faster pace than pipeline capacity.

CNX Resources

CNX expressed the most conservative philosophy of the three companies on hedging, with 91% of CNX's gas production hedged for the fourth quarter.

Although CNX executives declined to expand on the details of their 2022-2023 planning, they were firm that the company remains committed to fuller coverage.

"We fundamentally believe that natural gas prices are impossible to consistently predict," CNX CFO Donald Rush said about the company's hedging strategy.

"You might guess right every once in a while, but not each and every year for decades. So we believe in the long run, you will catch any gas price upside in the forward markets. And over long periods of time, you will not miss out on gas price upside and we'll still protect the downside for consistently forward hedging over decades."

EQT

EQT took a middle path between Antero and CNX, hedging 65% of 2022 gas production and less than 15% of 2023 production.

Executives announced that EQT had recently restructured its hedge book for the fourth quarter of 2021 and full-year 2022 in order to capture more upside exposure to prices.

The company repositioned by "purchasing a significant number of winter call options at very attractive prices and strike levels that are currently in the money," as well as buying swaps in 2022 "at points on the curve we felt to be undervalued," CFO David Khani said.

EQT CEO Toby Rice expressed a bullish macro outlook for gas prices, positioning the company's new hedges as part of its strategy to tackle financial goals.

"Our reasons for hedging 2022 production at the levels we did while continuing to keep 2023 exposure open is simple: We believe that regaining our investment-grade rating and reducing absolute debt levels best positions EQT shareholders to fully capture these thematic, long-term tailwinds in the commodity," Rice said.

Production outlooks

All three producers emphasized their commitment to maintenance programs, eschewing intentional production growth to focus on paying down debt and returning cash to shareholders.

Antero CEO Paul Randy asserted that the company plans on keeping production flat.

CNX Resources revised its fourth quarter production guidance slightly higher, but Rush noted that the company plans on maintaining a "one rig, one frack crew" operation, with any fluctuations in production attributable to those teams' performances.

Earlier in the year, EQT grew its output through consolidation, acquiring Alta Resources and Chevron's Appalachia assets. When asked in Q&A about whether EQT plans on increasing production to take advantage of higher prices though, Rice said that EQT is "not contemplating growth."

Q3 financial results

For the quarter ended Sept. 30, EQT had a net loss of $1.98 billion ($5.55/diluted share) compared with a net loss of $600 million ($2.35/diluted share) in the year-ago quarter.

Antero had a net loss of $549 million ($1.75/diluted share), compared with a net loss of $536 million ($1.99/diluted share) in the third quarter of 2020.

CNX Resources had a net loss of $873 million ($4.05/diluted share), compared with a net loss of $354 million ($1.61/MMBtu) in the year-ago quarter.