Gas Producers Brace for Q1 Losses as Insufficient Hedges Impact Earnings and Cash Flow

Hedges are unable to offset the price decline, harming gas producers. According to analysts and industry experts, gas producers face a challenging start to the year as declining prices put their first-quarter profitability and cash flows in jeopardy. Hedges, the industry's equivalent of price insurance, are insufficient to balance the anticipated losses, which is why this is the case. In order to sell more gas at the current market price of $2.45 per million British thermal units (mmBtu), which is below the breakeven price for producing gas in some places, producers that began the year with fewer hedges than normal will have to increase their hedged gas sales. This can cause some businesses to reduce their drilling and put off finishing wells. Hedges: Essential for Defending Cash Flows Producers can safeguard their cash flows from price fluctuations by using hedges, or contracts that lock in prices for future output. At a time when Europe is dependent on the United States for gas, this is essential. According to Matt Hagerty, senior energy strategist at FactSet's BTU Analytics, this year's low market prices will cause low levels of hedging to deplete cash flows. According to statistics from consultant Energy Aspects, which followed 40 publicly listed gas companies, just 36% of 2023 gas output was hedged at the end of September. From April to October of last year, these producers only executed two to three swap agreements each month, according to David Seduski, a natural gas analyst at Energy Aspects. Rally in Prices Brings Losses Hedging Following Russia's invasion of Ukraine in 2022, a price surge forced many manufacturers who had already hedged at lower prices to incur hedging losses. For producers that weren't ready for the price increase and may have sold off their hedges, leaving them susceptible to the present situation, Trisha Curtis, CEO of energy consultant PetroNerds, said last year was "quite shocking." The largest natural gas producer in the United States, EQT Corp, said last month that it anticipated a $4.6 billion loss on derivatives for 2022 and $5.9 billion in net cash settlements. The No. 2 producer, Southwestern Energy Co, reported a derivatives loss of $6.71 billion for the first nine months of 2022. Inactive Hedges Exposure to current prices is increased Some businesses have increased their exposure to current pricing by allowing their hedges to expire. The vast bulk of Antero Resources Corp's hedges will roll off by January 1st, the company stated in October. The degree of the price decline, according to economists, might force a three-way collar, another sort of hedge, to backfire. In these deals, producers purchase a contract to sell natural gas at a certain price while simultaneously selling a put at a lesser price in an effort to profit from the buyer's premium. However, the advantages of the hedging are diminished if gas prices drop below the anticipated lower price. For instance, Chesapeake Energy Corp. purchased puts for $3.40 per million cubic feet (mmcf) and sold them at $2.50 mmcf for the first quarter. The corporation would pay out 14 cents per mmcf if gas prices were to average $2.36 per mmcf, lowering the earnings from the hedge.