The CEOs of big-time natural gas producers like Chesapeake Energy (NYSE:CHK), BP (NYSE:BP), and EOG Resources (NYSE:EOG) have been talking up the beaten-down commodity lately. These executives are always worth listening to, because they provide plenty of interesting data points during their quarterly conference calls and other presentations. That said, it's just as important to watch what they do.
Take EOG. CEO Mark Papa talked in August about how the company had "become more bullish regarding 2010 and 2011 gas prices." EOG says it has an elaborate natural gas supply model supporting this sentiment. Nevertheless, keep in mind that the company -- perhaps taking a cue from Apache (NYSE:APA) -- is making a determined move toward a more balanced gas / liquids production split. EOG's guidance is for a drop from 75% / 25% in 2007 to a 50-50 split by around 2013.
Maybe EOG is super-bullish on oil and just plain old bullish on gas. The company's de minimis hedging for 2010 in either commodity could actually support such a view.
Then there's XTO Energy (NYSE:XTO), which is feeling no pain thanks to a hedging strategy that locked in some stratospheric commodity price realizations for 2009. XTO's modus operandi won't change in 2010, with the company having just locked in 55% of total production at an average natural gas-equivalent price of $9.63 per thousand cubic feet (mcf). That, of course, includes some heady oil hedges, and we know that oil is trading at an historic premium to natural gas.
Isolating the natural gas hedges, we see that XTO has layered on an additional 520 million cubic feet per day of swap transactions, at around $5.84 per mcf. That price might sound high compared with today's depressed spot market, but it's about in line with where the early 2010 futures are trading. It's also quite a bit lower than that $7.50 to $8 gas that EOG's Papa has talked about, or the $6 to $9 range that Chesapeake's Aubrey McClendon apparently foresees.
In its press release, XTO Chairman Bob Simpson assured investors that he and his colleagues "remain confident of a stronger natural gas environment" next year. That may be so, but caution is actually the word that comes to mind.
