With what could be a difficult third quarter earnings season for the oil and gas industry about to get underway, Southwestern Energy Co. this week announced a series of financial measures to “reinforce its resiliency and strategic flexibility in a low commodity price environment.”
The Appalachian pure-play said it’s added more hedges covering 186 Bcf and 99 Bcf of its natural gas production in 2020 and 2021, respectively. There was also no change to the company’s borrowing base under its $2 billion credit facility during the fall redetermination.
The company announced that it has repurchased $50 million of senior notes with funds from noncore asset sales, as well. Management added that Southwestern now has no significant maturities until 2025.
A recent survey from Haynes and Boone LLP found that for the first time in three years industry respondents expect oil and gas producers to see their borrowing bases decline this fall as credit availability contracts on a worsening outlook for commodity prices. The amount of borrowing bases depends heavily on forecasted prices of oil and gas reserves that are compiled by banks. A separate survey of the lenders’ price decks conducted by Haynes and Boone showed oil prices declining by 1.4% and natural gas prices declining by 6.5% compared to last spring’s forecasts.
“The fear is a lower price deck would reduce the borrowing amount allowed under these facilities, which could in turn force producers to hedge more of their 2020 production than they might otherwise like to,” said NGI’s Patrick Rau, director of strategy and research.
Companies need cash flow to support their operations and service debt. Haynes and Boone said respondents to its latest survey reported higher hedging levels than in previous polls as they act more aggressively to protect cash flow and guard against commodity price risk.
“Southwestern just had its borrowing base reaffirmed, and they had no balance on that facility anyway, so any additional hedging they do is probably more a business decision and less about its ability to borrow,” Rau said. “But investors will be keying in on the impacts of any revolver redeterminations on other non-investment grade independent producers in particular. I’ll bet management teams spend more time than normal on this topic during 3Q2019 earnings calls.”
Southwestern, which produced 186 Bcfe in 2Q2019, now has 111 Bcf of its 4Q2019 natural gas hedged at a weighted average sales price of $2.85/MMBtu. It has 360 Bcf of its 2020 volumes hedged at $2.63/MMBtu and 134 Bcf of its 2021 volumes hedged at $2.55/MMBtu. The company also has some natural gas liquids and oil hedged over the same time.
Southwestern said its derivative positions include fixed price swaps, two-way costless collars and three-way collars, a mix it said provides protection to downside risk and partial price upside.
Management said in August that the company would drop four rigs and cut the high-end of its full-year capital guidance range as it aimed to better control costs and respond to deteriorating commodity prices.
“Records and extremes have been a running theme in the natural gas market this year,” RBN Energy LLC said this week. The firm noted that daily prompt-month contract settlements this injection season, from April to September, have averaged the lowest in over 20 years as production has set records and demand has failed to match it. The spot market has been volatile too, while oil prices have yo-yoed throughout the year on a variety of factors.
Producers have had to deal with the reality at the same time they face investors searching for better returns and stronger capital discipline.
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