Rolling three-year hedge program
In order to protect its cash flows and ensure targeted returns, Southwestern Energy (SWN) has a rolling three-year hedge program. It’s carrying out these hedges using a variety of financial instruments such as fixed price swaps, two-way collars, three-way collars, and long puts.
Fixed price swaps
For 4Q16, Southwestern Energy has fixed price swaps on NYMEX (New York Mercantile Exchange) natural gas (UNG) prices for 51.0 Bcf (billion cubic feet) with a price of $2.81 per MMBtu (million British thermal units).
Two-way costless collars
For 4Q16, Southwestern Energy also has two-way costless collars on NYMEX natural gas for 40.0 Bcf. In its collar strategy, SWN has sold (or short) call options with a strike price of $3.33 and bought (or long) put options with a strike price of $2.93.
Most of SWN’s hedges were created using the above two financial instruments. But SWN also has hedged volumes of 5.0 Bcf and 4.0 Bcf using three-way costless collars and long put options, respectively. Other upstream companies such as Bonanza Creek Energy (BCEI), Pioneer Natural Resources (PXD), EOG Resources (EOG), and Parsley Energy (PE) are also using three-way collar strategies to hedge their 2017 productions.
Will SWN’s 4Q16 hedges result in profit?
Assuming December 31, 2016, for a NYMEX natural gas price of $3.72 as a final settlement price, both of SWN’s hedges with a majority of hedge volumes will result in losses. Fixed price swaps will result in realized prices of $2.81 per MMBtu, a loss of 0.91 per MMBtu. Even two-way collars will result in a loss of $0.39 per MMBtu.
Overall, as of September 30, 2016, SWN has derivative coverage for ~50.0% of its forecast production of ~197.0 Bcfe for 4Q16.