Earnings season has given us an updated look at producer hedges for 2017. Since the Marcellus and Utica will drive the majority of natural gas production activity in 2017, we focused in on how Northeast producer hedging has trended for key producers in the region. The figure below shows that most of the top Northeast producers have added gas hedges during the fourth quarter 2016, as compared to the third quarter.
Note that this is company-wide data, and not just for Northeast production, though most of the chosen companies have portfolios where the majority of natural gas production is centered in the Northeast.
Leading the group, Antero Resources is fully hedged for 2017, and Rice Energy is over 90% hedged. Consol Energy, EQT, Gulport Energy, and Range Resources have all added hedges over 10% of their total estimated 2017 production since the third quarter 2016, based on Bloomberg consensus production estimates. It is worth noting that producers that are the highest hedged are generally the ones targeting considerable production growth for 2017. Antero, Rice, and Range are all hedged over 75%, and are all guiding to double digit production growth YOY, at 20-25%, 59%, and 33-35%, respectively.
Part of the increase in hedges quarter-over-quarter may be attributed to the forward curve strengthening near the end of 2016, and producers taking advantage of the opportunity to lock in attractive prices. This is illustrated in the figure below, with the curve on 12/1/16 averaging about $0.30/MMBtu higher than in previous months, including at the end of the third quarter in September.
Not only is there a high percentage of production hedged across these chosen top northeast producers, the magnitude of the amount hedged is also noteworthy, with over 10.6 Bcf/d hedged, as seen in the figure below.
With so much of the Northeast materially hedged, the outlook for Northeast production is not expected to fluctuate much with Henry Hub spot price volatility throughout 2017. While this summary does not capture basis hedges, these operators generally have extensive transportation portfolios out of the basin.
BTU Analytics does see 2017 shaping up to be more bullish than the current forward curve, as we expect there to be a disconnect between supply and increasing demand until additional takeaway out of the Northeast materializes. Our Henry Hub Outlook provides additional insight into our views on what will drive natural gas pricing.
Increased hedging may also be an indication of sentiment and concern with market volatility – a major wild card that is creating uncertainty is the timing of when Northeast pipeline takeaway projects will in fact come online, with Energy Transfer’s Rover pipeline being of particular interest. Slated to come online this summer, there is still risk around achieving this timeline given a tight window to finish clearing trees. Since the project has a large capacity of 3.25 Bcf/d, its timing will greatly impact not only the Northeast but the US supply/demand balance as a whole and thus pricing at Henry Hub. For a deep dive into the Northeast, including the implications of when Rover comes online, see our latest edition of the Northeast Gas Outlook published this week.