Natural gas prices have been falling substantially, which is going to negatively affect all natural gas producers. Some natural gas producers will be negatively affected more than others due to their relative lack of hedging. Below is a list of the 5 most underhedged pure (or mostly pure) natural gas producers. Excluded are the natural gas producers who have more oil production than natural gas production such as Pioneer Natural Resources, ExxonMobil, ConocoPhillips, Chevron Corporation, and others. The table lists how much each producer is hedged as a percentage of total production in 2023 and 2024 and their current equity to debt ratio. The hedge ratios are based on the latest earnings reports, which is the 3rd quarter 2022. Equity estimation is based on the latest market capitalization of each publicly traded stock.
Although Antero Resources is currently the least hedged among the pure natural gas producers, they will likely be 50% hedged when they report their 4th quarter 2022 earnings in late January-2023. Antero Resources typically hedges their annual production a month prior to the beginning of the year. They probably hedged about 50% of their 2023 production with swaps and futures sometime in December 2022. Coterra Energy is the 2nd least hedged pure natural gas producer. Coterra Energy has about 2.2 Bcf/d of production in the Northeast and 600 MMcf/d of production in the Permian. They are exposed to the extremely low Permian natural gas prices, but they also have oil production in the Permian, which would offset the negative impact from the extremely low Permian natural gas prices. Coterra Energy has a strong balance sheet with a high equity to debt ratio of 2.54. Tellurian is the 3rd least hedged natural gas producer and probably the most vulnerable producer to lower natural gas prices. This is because Tellurian has been losing money even in a $6/MMBtu plus Henry Hub pricing environment. All of Comstock Resources hedges are wide collar hedges with an average ceiling at $9.56/MMBtu and an average floor at $2.97/MMBtu for all of 2023. They are about 53% hedged in notional option volume. However, option delta adjusted, Comstock Resources is significantly less than 53% hedged since the $2.97/MMBtu puts are quite a bit out of the money for 2023. Also, Comstock Resources has a low equity to debt ratio, which means they are more heavily levered than other pure natural gas producers. Chesapeake Energy is the final and 5th least hedged producer among the list of pure natural gas producers. Chesapeake Energy has 1.1 Bcf/d of fixed price hedges at $2.70/MMBtu in 2023, along with collar hedges of 558 MMcf/d with an average floor price of $3.43/MMBtu and an average ceiling price of $5.83/MMBtu. Chesapeake Energy is about 44% hedged for 2023 and 12% hedged for 2024.
What Natural Gas Price Causes Trouble for the Least Hedged Producers
The question now is at what natural gas price do the relatively unhedged natural gas producers begin to get into financial trouble. For Tellurian, they were already in a negative cash flow from operation situation in a $6/MMBtu plus Henry Hub pricing. They are by far the most vulnerable to lower natural gas prices. Comstock Resources is another vulnerable relatively unhedged natural gas producer. Comstock Resources has the following relationship between their free cash flow and the natural gas price.
Comstock Resources gets into a flat free cash flow situation at around the $3/MMBtu pricing level. Probably not coincidentally, their floor hedges are set at an average strike price of $2.97/MMBtu in 2023.
Antero Resources is a Northeast natural gas producer with a relatively low-cost structure. They don’t get into a flat free cash flow situation until the Henry Hub price gets down to around $2/MMBtu.
Chesapeake Energy has production in both the Northeast and now the Haynesville with the buyout of Vine Energy. Chesapeake Energy doesn’t get into a flat free cash flow position until the Henry Hub price gets down to around $1.75/MMBtu.
Summary
Some relatively unhedged natural gas producers are going to have financial difficulties if natural gas prices drop any further from current pricing levels. The most vulnerable when adjusted for cost structure and equity to debt ratios would be Tellurian, followed by Comstock Resources, Chesapeake Energy, Antero Resources, and Coterra Energy. Tellurian and Comstock Resources are much more vulnerable than lower cost producers such as Chesapeake Energy, Antero Resources, and Coterra Energy.
