Natural Gas Prices on the Rise!

It looks like natural prices are on the rise again.   Will the prices continue to rise now leading into cold weather months?

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Permalink Reply by Jack Straw on October 1, 2014 at 11:01am

RE: "I`m thinking Consol receives a higher Mcf price because of their 15 year contract with Dominion."

In long term contracts (as in any contract) each party attempts to get as good a deal for themselves, as possible.

The price and terms agreed to at the time a contract is signed will be based upon the opinions and future market predictions held by each party at the time the contract is signed.

The selling party will agree to sell an amount of gas that they feel confidant they will be able to provide at a price they consider fair; there will likely be some sort of escalator clause (such that the price received increases with time).

The buying party is thus assured a quantity of gas they feel that they will need... locking in a price that will allow them to make concrete forward plans.

Who gets the better part of the deal (buyer or seller) of a 15 year contract might only be determined near the end of the contract period.  

Given the historic cyclical nature of the O&G Business, contracts signed during the high priced boom will likely end up beneficial to the seller.

Given the historic cyclical nature of the O&G Business, contracts signed during the low priced bust will likely end up beneficial to the buyer. 

Or, then, it might just average out over time; with buyer getting the better deal over a portion of the duration of the contract .... and the seller getting the better deal over a portion of the duration of the contract.

 

RE: "I`m just trying to understand the pricing structure for gas royalties"

The only accurate way of understanding the individual pricing structure for gas royalties is by viewing them in 'the rear view window'; with the assistance of a forensic O&G accountant.

Sometimes all that you can understand is that you are in it for the ride .... sitting on a seat at the back of the bus.

All IMHO,

                JS

Permalink Reply by Adam Martin on October 16, 2014 at 3:35am
Jack - Been reading a lot of your comments when it comes to royalty owner pricing and how the local markets play a large factor in what you ultimately see in your check. My biggest question is how this is policed and do you happen to know the name of a great forensic O&G accountant / law firm who could dig into this detail? Looking at some data found on the Howard Weil Research Report for the 2Q of 2104 a list of the larger operators in Marcellus and Utica are reporting on average of After and Before Hedge pricing between $4.50 and $3.50. None of my royalty payments have been in this price range so how can these companies get away with paying such low prices? It seems criminal to me and good luck finding anyone who can explain in clear language exactly what folks should expect to receive. Appreciate any info you could provide, thanks.
Permalink Reply by Dexter Green on October 16, 2014 at 4:49am

"Looking at some data found on the Howard Weil Research Report for the 2Q of 2104 a list of the larger operators in Marcellus and Utica are reporting on average of After and Before Hedge pricing between $4.50 and $3.50. None of my royalty payments have been in this price range so how can these companies get away with paying such low prices? "

Because those are hedges, not the prices they're actually realizing within the basin.  They're buying and selling contracts on the open market to offset price fluctuations from their own wells.  If you want to understand commodity hedging then you need to either go to college for a few years and study finance or start reading every book ever written about it.  The commodity market is staggeringly complicated and the way these companies do their accounting (especially Non-GAAP) is so far beyond the grasp of us normal people.  

Permalink Reply by Adam Martin on October 16, 2014 at 5:49am
It is amazingly complicated but I appreciate your comments. What I don't understand is my family is currently under a lease with an operator who specifically called out to us, their hedging price over the next 3 to 5 years that's what they pay per MCF. They used this as examples to show what the royalty will pay out based on x amount of volume. This operator is one of the large ones, operating in SW Marcellus and Utica. Now we've yet to receive a check from them to confirm but another operator in the same area is also listed on this chart / data that I referenced in my earlier post. The data is titled 2Q 2014 Natural Gas Realizations.

http://investors.anteroresources.com/files/doc_presentations/2014/2...

Slide 16

Take a look for yourself and I appreciate any feedback.
Permalink Reply by Dexter Green on October 16, 2014 at 6:02am

The realized price is not the price that they are selling at the wellhead.  It includes their hedges.  It is also an estimation based on average NYMEX price less the average differential.  That's a whole lot of guessing and averaging.  What's the price you're being paid on your royalty stub, if you don't mind my asking?

Permalink Reply by Adam Martin on October 16, 2014 at 6:16am
Last check received was for August production and that price was $2.45 per MMCF.
Permalink Reply by Jack Straw on October 1, 2014 at 10:38am

RE: "actually jack, the price that your lesse(s) sell your gas for is what matters"

True, but the price that YOUR gas sells for is related to the prices that are prevalent at the hub into which your gas is marketed (with little relationship to the hub on the outskirts of Henry, Louisiana).

Most O&G Operators tend to sell a large portion of what they are confident that they will be able to produce forward in the market hedging ... essentially selling the gas at a negotiated price before the gas is produced); then they additionally sell that portion that was unhedged (as produced) on the spot market.

In so much as Royalty holders are not typically privy to the exact terms under which the O&G Operators sell the gas .... the local hub prices are the only approximating proxy that can be easily watched (noting that there can and are occasional wild short duration gyrations at times of local glut or shortage).

RE: "no index is any more than an indicator of which way gas prices are trending for us mineral owners."

However, the local hub through which your gas is sold is a better indicator of which way gas prices are trending for us mineral owners than a distant hub selling into a different market. You have to glean what information you can from those sources that are available (understanding their imperfections).

RE: "those spot prices that you quoted earlier in this thread are misleading at best"

Those spot prices quoted were the average daily actual prices that Natural Gas was selling at the various quoted hubs for next day delivery. Nothing misleading about that .... they are what they are, a snapshot in time. They are about as misleading as the price on a gasoline pump, at the time one is filling the tank. What those spot prices indicated was that Natural Gas prices realized in the Marcellus/Utica do not follow the NYMEX Henry LA Hub prices in lockstep .... there is a major disconnect in price and sometimes  in direction (largely resulting from our regional surpluses).

All IMHO,

                  JS

 

Permalink Reply by wyalusing jim on October 1, 2014 at 2:00pm

jack straw said

"RE: "actually jack, the price that your lesse(s) sell your gas for is what matters"

True, but the price that YOUR gas sells for is related to the prices that are prevalent at the hub into which your gas is marketed..."

our price is only related to an index at a hub in close proximity in that our price is one factor in the weighted average which makes up that index.

our gas could be sold at a price significantly higher or lower than any index at any hub, including the one at which our gas might be sold.

yes, henry hub prices have almost no relationship to the prices at which our gas is sold here in the northeast. generally though, if henry goes up, our prices are also likely to go up and vice versa.

the reason that I point out to you that spot prices are misleading is, that those prices only make up a small percentage of the price upon which our royalties are based. further, the percentage, being always small, will constantly vary from month to month depending on how much gas our lessee(s) are forced to "dump" on the spot market. it is also possible, that in any given month, our lessee(s) may not sell any gas at spot. if none of our gas is sold at spot, spot pricing is irrelevant to us.

when you use the ice spot pricing guide, you should pay attention to the volumes that were sold for that day. they vary quite a bit from day to day, but are usually never very significant in relation to the total amount of gas sold.

how a company manages its' gas sales is one of the most important factors in assessing how good of a job they are doing for us. unfortunately, it is almost always something that no one considers when choosing a lessee.

wj

Permalink Reply by Jack Straw on October 1, 2014 at 3:30pm

RE: "the reason that I point out to you that spot prices are misleading is, that those prices only make up a small percentage of the price upon which our royalties are based."

That may or not be true, depending upon the particular company that is your producer. Depending upon the particular company and the particular year, what a potential buyer is prepared to do, etc. .... cannot generalize for a particular situation as to what percentage spot prices will contribute to the price at which royalties are based.

Each company decides upon the amount (percentage) of Natural Gas that they chose to hedge or devote to long term sales contracts.

Some companies are more cautious than others, committing a greater proportion of their anticipated production to hedges or contracts. Their are multiple reasons why they might either choose or be forced to be cautious.

Some companies are more adventuresome than others, committing a smaller proportion of their anticipated production to hedges or contracts. Their are multiple reasons that might either choose or be more aggressive in providing Natural Gas to the spot market. If a particular company is of the opinion that Natural Gas prices are soon to rise, they are more likely to depend more upon sales to the spot market. If a particular company feels that it has sufficient resources that assurance of having dependable cash flow is not critical, they may be more likely to depend more upon sales to the spot market.

Making a correct decision as to how much to hedge or commit to a long term fixed price contract is very important to a company's profitability..... a good decision can make a lot of money for a company .... making the wrong decision can cost the company a lot of money.

RE: "how a company manages its' gas sales is one of the most important factors in assessing how good of a job they are doing for us. unfortunately, it is almost always something that no one considers when choosing a lessee."

True .... but, past performance does not guarantee future performance; unfortunately, it is very often something that cannot be predicted with accuracy. 

Staff changes, strategies change (strategies are likely reviewed at least once a year .... and subject to change); a strategy that worked in the past might fail in the present ..... and there are the dreaded 'Black Swan' events.

Companies do not publish, in advance, what percentage of their production they intend to hedge, contract or sell on the spot market in 2015, 2016, 2017, etc.

A Royalty holder may find that the company that they leased to has sold to a another company ... one who might be less successful in how they market.

Not being able to predict what your O&G producer will do in the future with respect to hedging, etc.).... all you might be able to do is follow the prices that are prevalent at the hub into which your gas is marketed as the price that YOUR gas sells for will be related to the prices that are prevalent at the hub into which your gas is marketed. If spot prices at your local hub is all that is available to predict the direction of future royalties if you can otherwise predict the decline curve); you just have to work with the hand you have be dealt. But sometimes when you think you are playing Pker, the dealer is dealing Black Jack.

All IMHO,

                  JS

Permalink Reply by wyalusing jim on October 2, 2014 at 1:17am

no one gets paid the spot price for royalties.

some companies have better marketing strategies and consistently do better at marketing than others.

wj

Permalink Reply by Jack Straw on October 2, 2014 at 6:12am

RE: "no one gets paid the spot price for royalties"

And I for one never said that anyone gets paid the spot price for royalties.; but sometime spot prices (at local hubs)are all that a royalty holder has to look at as a predictor of the direction in which the royalties ($/mcf) are headed.

The reality that no one gets paid the spot price for royalties does not mean that the trend in spot prices (and their absolute value) is not worth following; at least on a casual basis.

RE: "some companies have better marketing strategies and consistently do better at marketing than others"

Some companies have better marketing strategies at a particular point in time. 

Some companies do better at marketing than others.

No company gets it 100% right, 100% of the time.

Some companies have weaker marketing strategies at a particular point in time. 

Some companies do not do as well at marketing than others.

As an example; Chesapeake are especially poor at predicting the future market.

No company gets it 100% wrong, 100% of the time.

All IMHO,

                  JS

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