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Natural Gas Drillers Rush To Hedge Production As Prices Soar

Shale gas drilling

Natural gas prices are soaring on cold weather and falling production, spreading optimistic conditions for gas producers for the first time in years. Natural gas spot prices are at their highest point since 2014, boosting share prices for drillers across the industry.

Because natural gas prices are notoriously volatile, many companies are not taking any chances, locking in hedges for future production. According to S&P Global Market Intelligence, many top U.S. natural gas producers have already started to secure hedges for their production at $3 per MMBtu, which stands in stark contrast to how they approached 2016.

For example, at the start of the year, Chesapeake Energy and Southwestern Energy Co. had no hedges for their 2016 production, a decision that likely haunted them as natural gas prices fell below $2/MMBtu for large stretches of the first and second quarters of this year. Having been burned by the market, Chesapeake and Southwestern seemed to have learned their lesson, with both companies recently moving to secure hedges for next year. Both companies have more than half of their estimated production locked in at $3/MMBtu, S&P Global Market Intelligence says.

Other companies are following suit, even drillers that are not exclusively focused on gas. "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 Energy’s CEO David Hager said on Devon’s quarterly earnings call in November. Devon, an Oklahoma and Texas-focused oil and gas producer, had 29 percent of its 2017 gas production hedged at $2.98, S&P said.

Locking in hedges at $3/MMBtu and above will provide a good bit of breathing room for natural gas producers, which have had a tough time over the past few years. Natural gas prices have not been this high since late 2014, and with NYMEX futures prices averaging above $3/MMBtu throughout 2017, a dose of optimism is spreading throughout the industry. Share prices for many natural gas producers likely have huge upsides heading into the New Year.

By Charles Kennedy of Oilprice.com

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