Nat Gas Prices Up; But Don't Spend the Money Yet!

Nat gas prices have jumped a good bit due to the harsh winter cold we have been having. Understandably, people getting royalties are excited about getting bigger checks.  But its best to stay calm as the royalty checks may not jump as big or as fast.

The price you see on the financial news shows or internet sites is almost always the Henry Hub in Louisiana. That price figures in the cost of dehydrating, compressing, separating and transporting the gas to that hub. The price that the companies get at more local hubs like the Leidy Hub in NE Pa can vary tremendously. Prices in some areas of Pa have often been $2 or more lower than the HH because there has been a glut in production here and a lack of pipelines to move the gas to where the best prices are.

Just a year ago, some gas in Pa was bought/sold for under $1.50 MCF.  Fortunately, because of new pipe lines, more compressor stations, and converting lines to run both directions the prices have become  more equalized through out Pa but are still around 0.75 to a dollar below the HH.

The other big issue that will hurt current royalty checks is that most all companies, both producers and buyers, hedge their sales to protect themselves from sudden price swings like these.  They use long term contracts and/or futures to hedge their exposure.   (When prices collapsed a few years ago Range Resources made more money from their hedge division then they did from their actual production sales) This means that much of the gas produced is under contract at a lower price point and royalties may not jump as quickly or as far as the HH price.

But the good news is that royalties will rise over time as these contracts expire and new ones take affect. Plus, companies will open up flow rates where possible, complete and put online wells that have been shut in, and drill new wells. For those not leased, there is also more interest in leasing especially if prices hold over $4 throughout the summer. 

So bottom line; enjoy what ya get but don't spend it until ya get it.

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Permalink Reply by James Rodenhizer on February 21, 2014 at 5:48am

I'm a fairly new landowner involved in a well that went into production last May (2013) in Bradford Co. PA.. I've worked for a Fortune 100 company for 34 years, many of those involved in leading a global supply chain for products produced and sold in all regions of the world. I appreciate the information above as it is helping me understand more of the gas "value chain", which is rather confusing and complicated to the average person who is not familiar with the market, supply chain or industry practice.

 

There happens to be 4 players (interest owners) in the well I am a part of. Each appear to have their own way of bringing (selling) the gas to market. What strikes me most is the disparity in unit price reported on the royalty check statements between the 4...and the comparison to reported NyMex spot price for the month.

 

  Natural   Gas Price comparison            
Reported Average  Chesapeake ANADARKO MITSUI STATOIL
NyMEX Spot Price Royalty   Royalty   Royalty   Royalty  
  Avg. NYMEX Price %NYMEX Price %NYMEX Price %NYMEX Price %NYMEX
May-13 $4.04 $4.16 103% $4.07 101% $3.91 97% 4.23 105%
Jun-13 $3.83 $4.06 106% $3.81 99% $3.69 96% 4.22 110%
Jul-13 $3.62 $3.32 92% $3.27 90% $3.07 85% 3.53 98%
Aug-13 $3.43 $2.98 87% $2.89 84% $2.58 75% 3.03 88%
Sep-13 $3.62 $2.94 81% $2.97 82% $2.50 69% 2.01 56%
Oct-13 $3.68 $2.98 81% $2.95 80% $2.68 73% 1.64 45%
Nov-13 $3.64 $3.25 89% $3.10 85% $2.84 78% 2.691 74%
Dec-13

4.24

                

I apologize for the data formatting, but far to the right is Statoil's unit price data and % of Nymex. I'm finding it hard pressed for this company to be so far away from their counterparts and moreover 45% of NyMex (ref $1.64 in October 2013).

 

There is allot of heated discussion relative to "deductions" and some lesser talk about royalty unit prices. Legislative actions are on the table to address "unfair" business practices in this area. I have to believe that oil/gas companies are forward integrated and we all know that they practice the art of selling gas to themselves (i.e. affiliates). Maybe Statoil got caught "hedging", but our company abandoned hedging practices on gold and silver as raw materials simply because you get burned more often that not.

 

I just look at the trend above and see a predominate shift towards lower reported unit price. I'd like to understand more on the distribution transactions all the way to the Henry Hub.

 

My guess is there's some reporting of intermediate prices to landowners that isn't what drives their bottom line in their earning statements.

Permalink Reply by gordon rockefeller on February 21, 2014 at 12:28pm

James,

Good article. Where can I get complete list of each company and what they paid per/month/1000cuft?

interesting data.

Thanks,

Gordon

Permalink Reply by James Rodenhizer on February 22, 2014 at 3:47am

Gordon,

The data in my original note above was summarized from the monthly royalty statements/checks received from the individual gas companies. If you receive royalty payments, you will note the unit price recorded in the statement. Nymex spot prices are available on the internet.

 

Jim

Permalink Reply by gordon rockefeller on March 1, 2014 at 3:21am

HELLO AGAIN JIM,

SORRY I DIDN'T SAY THANKS FOR YOUR RESPONSE. IM AN ENGINEER AND RETIRED EXECUTIVE PRETTY WELL GROUNDED IN BUSINESS MEASUREMENTS,

FINANCIAL MEASUREMENTS, ETC AND KNOW THIS MONTHLY PRICE PAID PER 1000CUFT/MILLION BTUS IS A VERY COMPLEX ISSUE REGARDING ROYALTIES.

I JUST WISH THE GAS COS WERE MORE FORTHRIGHT IN KEEPING LANDOWNERS

INFORMED ON FUTURES, HEDGES,CURRENT RATES AND HOW THEY IMPACTED  LANDOWERS. I WOULD LIKE, DONT HAVE TIME, TO TRACE THE WHOLE PROCESS OF GAS FLOW FROM CERTIFIED METER AT WELL HEAD TO MARKET ON VARIOUS WELLS BY VARIOUS COMPANIES TO VALIDATE THE PROCESS AND TRY TO UNDERSTAND   

CREDIBILITY AND VARIABILITY OF WELLS AND GAS COMPANIES PROCEDURES.

JUST OBSERVATIONS.

THANKS AGAIN,

GORDON

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on February 21, 2014 at 6:10pm

Dennis,

Operators lock in sales prices for a certain volume, rate, and time.  They then make futures hedges against that price and time frame in order to cushion themselves against market volatility. Good hedges make it more profitable for the company but not necessarily for the royalty owner who may be locked into a price for 12-24 months.  For a royalty owner in a shale well--whose best years are heavily front-loaded--that first delivery price negotiated by their operator can make a huge difference.  Everyone who was put into production over the last two years is going to make substantially less on a per MCF basis than someone whose well will be turned on this Spring when delivery prices are likely to be 30-50% higher.  

Permalink Reply by Philip Thackray on February 22, 2014 at 3:23am

Jim,

Thanks again for an interesting blog.

There are many takes on the future of gas prices - here is a recent one:

http://blogs.wsj.com/corporate-intelligence/2014/02/20/forget-the-f...

FWIW - Based on payments from an XTO unit of which I am a part here are XTO's gas sales prices for the two months that I have been paid:

October 2013  $3.74 / mcf

November 2013 $3.57 / mcf

I'll have December on Monday

Regards,

Phil

Permalink Reply by James Rodenhizer on February 22, 2014 at 4:01am

Phil,

Thanks ...I also subscribe to the old supply/demand economic pricing model as referenced in the article you provided above. Demand in the long haul will eventually increase appreciably when liquification capacity is brought on-line to spawn exports. Gas fired electrical energy plants, industrial, transportation and residential consumption will make an incremental dent ...but the real impact will eventually come when exports compete for the supply. Global demand for energy will continue to increase.

My thoughts from what I've read to date....

Jim

Permalink Reply by Jeff Kerr on February 22, 2014 at 6:05am

IF NG PRICES GO UP DOS'E THE WELL HEAD PRICE GO UP TOO

Permalink Reply by Tim Tarr on February 22, 2014 at 9:45am

The other big issue that will hurt current royalty checks is that most all companies, both producers and buyers, hedge their sales to protect themselves from sudden price swings like these.  They use long term contracts and/or futures to hedge their exposure. 

Wait a minute here. When prices were ~$3.20 MMbtu that's what my statement reflected not their hedged price of ~$4.00 MMbtu. So they damn well better reflect ~$5.50 MMbtu and not their Hedged prices of $4.00 now. They better not even attempt to pull that B.S.

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