Low Natural Gas Prices May Cause Regrets for Producers

Natural gas producers are being adversely affected by a drop in natural-gas prices, especially those who bet big on the idea that prices would rise.  The price dropped from $3.90 per million BTU (British thermal units) in November 2012 to $3.11 in January 2013, with a key reason being reduced demand from warmer-than-usual temperatures.

Analysts continue to predict that prices will fail to rebound in 2013.  If their predictions hold true, 2013 may be a continuation of 2012, when high supplies and unseasonably warm weather drove natural gas prices to the lowest level in a decade.  Despite a year-over-year decline of almost 50 percent in the number of rigs drilling for gas, current production is substantial, possibly because gas is often produced as a result of oil drilling.  Nevertheless, one cause for optimism among producers is that gas prices are still predicted to be higher than the average last year.  Consistent with that, prices have risen since January 2013 and in early April 2013 hovered near $4.00 per million BTU.

A key point about the trend in gas prices is that some companies may have made mistaken forecasts about natural gas prices and failed to hedge against the risk of decline in gas prices.  If natural gas prices decline over the remainder of 2013, these companies will look back with regret on their failure to lock in hedges when gas prices were around $4.00.  The impact of volatile gas prices on a company’s bottom line can be illustrated by the following example: industry giant Chesapeake Energy estimates that a 10 percent decline in natural gas prices in 2013 would shave $100 million off its EBITDA (earnings before interest, taxes, depreciation, and amortization).