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What 9 Company Hedge Books Are Revealing About The Natural Gas Market
Submitted by Keith Schaefer via OilPrice.com,
You can see it clear as day in their hedging strategies...
Natural gas producers are increasingly bearish on prices for their sector.
The numbers tell the tale. Canadian gas producers surveyed for the Oil and Gas Investments Bulletin hedged AECO-sold production at $5.27 in 2011. Hedge prices have dropped steadily for gas sold since—to $4.27 in 2012, and to $3.29 for currently-hedged production in 2013.
Why the falling hedge price? Because it made sense – Natural gas prices fell steadily from the beginning of 2010 through to early 2012. Faced with two years of declines, producers looked to stave off further price risk by forward-selling (hedging) their output.
So what has happened since the second quarter of 2012?
Gas prices have been rising. The monthly average AECO (the Canadian benchmark price out of Edmonton AB) price is up 110% over the last year. NYMEX gas has gained 95%.
Producers, however, have not responded with the same confidence. Despite stellar gains in the gas price, firms continue to hedge at low levels. In fact, for the first time in years, hedges appear to be working against producers—forcing them to sell gas at prices below market value.
Here's what one junior gas producer says about their hedging strategy...
“We’re actually thinking of unwinding some of our gas hedges now—at least in part,” says Heather Christie-Burns, President and COO of Angle Energy (NGL-TSX). “Our hedge book for natural gas is in a loss position right now, for what our strip pricing was then.” She adds that Angle does not have any hedging on for 2014.
So, could a rising commodity price and continued bearishness from industry insiders be a recipe for investor profits?
Hedging: A Good Idea... at the Wrong Time?
To see what hedge books tell us about the direction of the natural gas market, I surveyed nine major, Canadian-focused gas producers and their hedges. (This is information that investors can find buried in the back of annual financial statements for most companies).
What we can confirm from these hedge books is that hedges are now starting to work against producers.
As mentioned above, in 2011 my surveyed producers hedged AECO gas at an average of $5.27. During that year, AECO spot had a monthly average of $3.48. Hedging paid off.
Same in 2012. During that year, producers hedged at an average $4.27, while AECO prices averaged $2.28.
But with prices rising through most of the past year, hedgers are now close to underwater. The average AECO hedge for 2013 is $3.29. But AECO prices have averaged $3.01 through to the end of April—a razor-thin discount to hedged prices. In fact, prices for April averaged $3.28–right at the strike price for the average hedge.
Producers that hedge on the NYMEX—indexing their sale price to Henry Hub rather than AECO—have seen a similar pattern.
NYMEX hedgers locked in an average $5.97 in 2011—nearly a 50% premium to the average Henry Hub spot of $4.00 that year.
In 2012, the average hedge of $5.40 was almost double the $2.75 average hub price.
But the differential has now narrowed. NYMEX hedges for 2013 average $4.19, while the spot Henry Hub price through the first quarter of the year ran at $3.49.
As the chart below shows, NYMEX hedges are fairing a little better than AECO hedges in maintaining a premium—but the gap is closing fast.
Optimism or Pessimism: A Look at What's Ahead
The really interesting part: Despite the doubling of gas prices over the past year, producers are continuing to hedge year-out production at relatively low prices.
The average AECO hedge price for 2014 is $3.80—just 15% higher than the $3.29 producers hedged at in 2013.
For NYMEX production, the hedging outlook is even less optimistic. NYMEX hedges for 2014 average $4.38. That’s barely above the $4.19 average for 2013.
These low-price hedges are looking like an increasingly risky bet. If prices rise just a little, producers will be losing money on the forward sales that previously improved their bottom line.
Despite this risk, gas companies are continuing to hedge aggressively. Look at the historical pattern. In 2011—when AECO prices were holding in the $3 to $3.50 range—AECO-hedged producers grew more optimistic. Only two of them, Pengrowth (TGF-TSX) and Penn West (PWT-TSX), hedged AECO production in the next year, 2012. Others tried to maintain exposure to spot prices, believing things could improve.
Of course, 2012 turned out to see a cliff-dive in the AECO price, to below $2.00.
That spooked producers. To the point where, even though we’re back at the same +$3 prices we saw in 2011, gas players are continuing to hedge heavily. Where only two companies hedged at these levels before, six firms are hedged for 2013 and three companies are already hedged for 2014—at the low prices mentioned above.
This looks like a classic case of the “know it best, love it least” syndrome, meaning this could be a buying opportunity—at least for the right companies.
What It All Means for Investors
With more firms hedging, investors looking for upside from rising gas prices need to be careful about where they put their money—especially today. With hedging activity rising the last few years, good deals in the hedge market are getting hard to find.
You can see this in the spread. In 2011, average AECO hedges for our surveyed companies ranged from a low of $3.81 (Angle Energy, NGL-TSX) to a high of $6.43 (Enerplus, ERF-TSX). That’s quite a difference in prices and profits!
But today elevated prices are hard to come by. 2013 hedges have a tight spread, ranging from $3.09 (Crew Energy, CR-TSX) to a high of just $3.37 (Baytex Energy, BTE-TSX).
If you’re hedged today, you’re getting a mediocre price for your gas. Plain and simple.
The good news for investors betting on a rising gas price is that not all companies are hedging the same volumes.
Companies like EnCana (ECA-TSX) and ARC Resources (ARX-TSX) are hedging as much or more gas next year. While firms like Crew Energy and Enerplus appear to be keeping significant volumes uncommitted for now—perhaps looking for price appreciation.
Angle Energy is our sole surveyed producer that has not hedged any output for 2014.
“I don’t think NYMEX natural gas prices are going to rock over $5/mcf, but it could touch $5,” says Christie-Burns. “There is a ceiling, there’s a lot of coal. But good hedges by the majors have allowed a lot of activity over the last two years, and now they aren’t making money on them. They can’t redeploy hedging gains back into more drilling like the last couple years.
“That bodes well for 2014—we think there’s upside for 2014.”
That reminds me of commodity guru Don Coxe, who said opportunities come in sectors where “those who know it best, love it least.”
The quote fits today’s natural gas sector to a T.
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What would Charlie Munger do?
http://www.youtube.com/watch?v=deuC8GPr31A
rigged like everything else, be aware
Bearish....! all the nat gas you want coming out of the DC beltway.
Yea, and no money to pay for it.
Buy UNG 2015 Leaps,
Plenty of gold miners were hedging as the price of gold rose 12 years in a row...
Like every other bullshit speculative market, every cent added to the price comes out of consumer's pockets. If the speculators believe the price will go to $5, they'll drive it to $10. They'll push it until the consumer breaks and decides to sit in a 20 degree house wearing four sweaters.
If we get back to $10 per mcf nat gas, consumers will say fuck you and won't pay the bill. Most cities make it illegal to shut off a customer's gas in the dead of winter.
Nobody fears collection anymore. In fact most say, bring it on. Even with $10k in unpaid credit debt and a 450 credit score, Citibank will still give you a $5k credit limit on a new card.
Tick tock, we can't see the clock.
"OilPrice.com is a CNBC Partner Site"
you have been warned ...
Ouch, That's toe stepin on matierial.
The belief is that the power industry will move to Nat gas, but the problem is that all generation companies have renegotiated their coal contracts to very nice rates. Gas units will sit quite idled during the summer peak. Natty price will be low $3s by August.
Check decreasing rig count. NG going higher, as is coal, and all energy. $7-$8 by 2014.
Rig Count for NG does show a decline. However, many of the rigs classified as drilling for oil are actuallly drilling for shale oil and liquids, which also brings lots of NG to the market. NG production continues to increase. Just look at the NG volumes comming from the Marcellus for example.
These companies have survived the near death experience of $2 NG prices. They consider it wise to insure that the insure survival at the expense of maximized profits if prices increase. They will get those higher prices with the next set of hedges, and stilll be in business.
Only if that NG is hooked into a pipe line system, otherwise it is flared, i.e. wasted....
I think they usually only flare it for a day or 3 to get the gunk out.
Nat gas chart shows a recent push up.
http://bullandbearmash.com/chart/spot-natural-gas-daily-shows-term-top-q...
Longer term, there's more downside ahead.
UPC...UPC...UPC.
Lead plated NG, bitches!
This is a pretty superficial description of the situation. Not too long ago NG was over $13. Some shale plays in the Marcellus came online with costs in the $2's. So when NG went to less than $2, NOBODY was making money, unless they were properly hedged. After a period of below zero profits, everyone is making sure they can drill their leases before they run out. Therefore, the price you are looking at has more to do with next year's drilling costs than anything else.
Never forget that 1 mcf of NG has a little over 1 million BTU's of energy which is equivalent to 8.8 gallons of gasoline which sells for $2.83 per gallon or $25. Yes, with NG you get $25 dollars worth of energy for $4.24. The NG industry is working energy miracles, but getting screwed for it. You can't blame them for switching to oil development, further putting their gas plays into a break even situation.
The nat gas market is insane. I sometimes trade it but on the inventory report Thurs. morning you should watch the candle it leaves at 10:30 am ET.
Nadex.com has been showing that big traders have been trading on EIA early by a few seconds, but last week, they did it a full 2 minutes early! and it's been the third time already that's happened, always UP.
If you want to know where natural gas prices are headed, ask John Arnold.
Nuff said