The US natural gas industry is heading into 2011 naked -- with 66% of gas production unhedged and no protection if prices drop, investment bank Raymond James said Monday.
"Many companies were reluctant to layer on hedges with gas prices so low relative to expectations or 2008 pricing," Raymond James' top gas analyst, Marshall Adkins, said in a note to clients. "Because hedging activity was much lower than expected, the group is entering 2011 with less downside protection to weaker gas prices."
Raymond James' analysis of the hedging positions of the 41 large-, mid- and small-cap gas producers it covers found that 34% of their gas production was hedged at an average floor of $5.92/Mcf.
While some exploration and production companies have begun getting comfortable with hedging at prices below $5/Mcf, most are reluctant to lock in prices that low and miss any move upwards by the market, it said.
Adkins noted that companies may also count on power generators switching to gas from coal to create a floor for gas prices at around $3.50/Mcf to $4/Mcf.
"While 2011 gas hedging is down substantially from 2010 levels (when companies entered the year with 50% hedged at $6.50/Mcf), we believe that E&P companies are equally bearish, if not more so, on gas in 2011 but are often reluctant to lock in prices at such low levels," Adkins said.
According to Raymond James, Fort Worth-based Marcellus Shale producer Range Resources is the most hedged large-cap independent, with nearly 90% of its planned production hedged at an average floor of $5.50/Mcf. Oklahoma City-based Sand Ridge Energy is the most hedged small-cap, Raymond James said, with roughly 85% of its planned production hedged with an average floor of $4.50/Mcf.
In both categories there are companies without any hedged production. Because E&P companies use the prices ensured by hedging to set their budget plans for the coming year, next year may feature abrupt drops in the rig count if prices stay low, Adkins said, because the money won't be there to operate as planned.
"2011 capital budgets, along with the rig count, are likely to be cut as the year progresses, assuming gas prices remain in the low $4/Mcf range," he predicted.
"Many companies were reluctant to layer on hedges with gas prices so low relative to expectations or 2008 pricing," Raymond James' top gas analyst, Marshall Adkins, said in a note to clients. "Because hedging activity was much lower than expected, the group is entering 2011 with less downside protection to weaker gas prices."
Raymond James' analysis of the hedging positions of the 41 large-, mid- and small-cap gas producers it covers found that 34% of their gas production was hedged at an average floor of $5.92/Mcf.
While some exploration and production companies have begun getting comfortable with hedging at prices below $5/Mcf, most are reluctant to lock in prices that low and miss any move upwards by the market, it said.
Adkins noted that companies may also count on power generators switching to gas from coal to create a floor for gas prices at around $3.50/Mcf to $4/Mcf.
"While 2011 gas hedging is down substantially from 2010 levels (when companies entered the year with 50% hedged at $6.50/Mcf), we believe that E&P companies are equally bearish, if not more so, on gas in 2011 but are often reluctant to lock in prices at such low levels," Adkins said.
According to Raymond James, Fort Worth-based Marcellus Shale producer Range Resources is the most hedged large-cap independent, with nearly 90% of its planned production hedged at an average floor of $5.50/Mcf. Oklahoma City-based Sand Ridge Energy is the most hedged small-cap, Raymond James said, with roughly 85% of its planned production hedged with an average floor of $4.50/Mcf.
In both categories there are companies without any hedged production. Because E&P companies use the prices ensured by hedging to set their budget plans for the coming year, next year may feature abrupt drops in the rig count if prices stay low, Adkins said, because the money won't be there to operate as planned.
"2011 capital budgets, along with the rig count, are likely to be cut as the year progresses, assuming gas prices remain in the low $4/Mcf range," he predicted.
