With natural gas inventories close to decade lows, investors would probably prefer an exploration and production firm with limited hedges to participate in the potential price appreciation of the commodity. It is a double-edged sword to risk production and long-term capital investments without knowing the future price, but in the current market it's undoubtedly disappointing to invest in a firm with extensive hedges at lower prices.
Range Resources Corp (NYSE: RRC ) is one of the largest and fastest-growing producers in the Marcellus Shale. The company has some of the most prolific wells helping it produce growth in excess of 20%. Unfortunately, the company is heavily hedged and not fully participating in the suddenly higher natural gas prices. It also will not benefit in a meaningful way in future price spikes over the next couple of years.
Other major independent players in the Marcellus Shale, including Cabot Oil & Gas (NYSE: COG ) and Southwestern Energy (NYSE: SWN ) , remain equally locked into hedges or infrastructure issues that limit upside potential.
Strong production growth
For the first quarter of 2014, Range Resources' production volumes reached a record high of 1,056 Mmcfe/d, a 21% increase over the prior year period. The guidance is to reach production that averages between 1,280 to 1,340 Mmcfe/d during the fourth quarter.
A couple of recent wells generated exceptional results in a couple of regions, providing potential for more uplift in actual results.
- A Marcellus super-rich well tested at 24-hour rate of an incredible 6,357 boe/d. Even more impressive, the well was part of a five-well pad that generated an average of 4,773 boe/d with 65% liquids.
- Another well in the Mississippian chat tested at 24-hour rate of 1,263 boe/d at 92% liquids providing the highest oil rate of any Range well to date.
- Three dry gas wells in eastern Washington County in the Southern Marcellus appear capable of over 20 Mmcf/d when production reaches full levels.
These numbers are exceptional considering that most wells are satisfactory at 1,000 boe/d production rates.
Likewise, Cabot increased production by 34% with the primary gains from the Marcellus Shale that grew 44%. In total, the company averaged 1,209 MMcf/d for the quarter. Southwestern Energy saw total production grow by 23% compared to the year-ago levels to reach 182 Bcfe. Incredibly, the company saw Marcellus Shale production soar 147% to reach 800 MMcf/d.
Too many hedges
One has to wonder if prices would've jumped higher by now if producers like Range Resources weren't busy selling future production. The current price is set at around $4.40 per mcf.
Range Resources has these natural gas hedges for the next couple of years:
- For the first quarter, natural gas production of 689 Mmcf/d sold at $4.20 per mcf while the average realized price before hedging settlements was $5.58.
- For 2014, the company has over 80% of its remaining production hedged at a weighted average floor price of $3.96 per Mmbtu and a weighted average ceiling price of $4.38 per Mmbtu.
- For 2015, the company has hedged over 422,000 Mmbtu/d of its expected natural gas at a weighted floor price of $4.17 per Mmbtu and a weighted average ceiling price of $4.33 per Mmbtu.
Nobody can deny that the polar vortex winter created a wild pricing scheme where prices in Boston and New York reached astronomical levels and prices down the road in Pennsylvania remained at recent lows. Regardless, it's difficult to understand the reasoning for locking in substantial amounts of production at prices where it's not economical to drill in most parts of the world.
Similarly, Southwestern Energy has a substantial amount of production over the next couple of years hedged at prices around $4.40 per mcf, including a substantial part of the remaining production for 2014.
Cabot Oil & Gas faces meaningful infrastructure issues in the Marcellus Shale, which is one reason it's shifting production focus toward the liquids regions of the Eagle Ford.
The low natural gas inventories and possibility of higher prices will have limited impact on the larger producers in the Marcellus Shale. All of the companies, and especially Range Resources, have already locked in prices for a substantial amount of 2014 production and even a fair amount of 2015. These moves limit upside benefits from an undersupplied market for natural gas.
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