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Is Henry Hub Obsolete As The National Price Benchmark?

Is Henry Hub Obsolete As The National Price Benchmark? thumbnail


  • The changing structure of the market for natural gas makes price realizations by producers in the Marcellus/Utica region disconnect from traditional benchmarks.
  • The Henry Hub pricing no longer adequately describes producer economics or producer behavior in the increasingly important Northeast region.
  • While Henry Hub will preserve its prominence as the key national benchmark, a rival price benchmark in the Northeast may emerge with time.

While the Henry Hub price remains the most broadly quoted and watched benchmark for U.S. natural gas, its relevance to investors focused on E&P stocks has substantially diminished recently.

Traditionally, the Henry Hub has been the natural gas price proxy for the Producing Region and an adequate benchmark for natural gas realizations seen by the majority, in terms of the number and combined market capitalization, of natural gas producers. Local basis differentials have always existed but, with few exceptions such as the takeaway capacity-constrained Rockies region several years ago, have represented a relatively small percentage of the realized price.

The market’s structure is rapidly evolving, however. With the Marcellus and Utica already providing over 20% of the U.S. aggregate natural gas supply and quickly becoming net exporters of natural gas, the Northeast Region pricing points are increasingly important benchmarks for many E&P companies and are critical to the understanding of the sector’s economics in general.

The Northeast Region pricing points are also increasingly relevant to stock investors as the combined market capitalization of Marcellus- and Utica-focused operators represents a disproportionately large percentage of the total Natural Gas sector market capitalization.

Given the availability of several major interstate pipelines connecting the Gulf Coast and the Northeast Region, one would expect a more or less predictable relationship to emerge between the Henry Hub and Marcellus pricing points once the balance of inter-regional flows is established. During the transition period, however, when existing pipeline flow configurations no longer reflect the market’s demand, such a relationship simply does not exist. Given the magnitude of the potential Marcellus and Utica production growth, such a transition period may last for quite some time.

The following graph shows how deep the disconnect has been this year between the two regions’ pricing.

(Source: EIA)

While many investors may think of the 2012 price environment as the absolute worst the industry has seen in a very long time, the current pricing in the Marcellus Region is in fact just as poor. The current quarter basis differentials in the Marcellus area may prove to be the worst of the four quarters in 2014. The widening of the basis is further exacerbated by the overall decline in natural gas pricing nationwide driven by the healthy pace of storage injections. In fact, the current pricing at certain Marcellus hubs is so low that shutting in production may make economic sense for producers.

As seen from the following graph, the historical Gulf Coast/Northeast Region pricing relationship broke down at the end of 2011, the same time when the glut of new production from the Haynesville and Marcellus sent natural gas prices into a tailspin. The graph represents the historical basis and basis futures for TCO Appalachia as of August 2013, a year ago. It shows an approximately $0.50/MMBtu swing in basis over a two-three year period. Actual basis change may prove much wider, at least in the near term, relative to what the market expected a year ago.

How long will the current Northeast basis anomaly last? Some market participants take an optimistic view that gas take-away constraints in the Marcellus/Utica will be mostly alleviated in less than two years. The slide below from Eclipse Resources’ (NYSE:ECR) presentation shows a forecast that implies a significant surplus in takeaway capacity relative to production already in 2016.

(click to enlarge)

(Source: Eclipse Resources, August 2014)

Eclipse’s forecast may prove to be a bit optimistic, however, given that some of the projects have already experienced delays relative to their original schedules and permitting of new projects often takes longer than planned. It is also important to take into account that for many of the new projects to go ahead, producers must sign binding multi-year demand commitments that lock in high transportation costs for decades to come. For such decisions to be made, producers must see a credible threat of persistently wide basis. It is difficult, therefore, to rule out a scenario that basis spikes may continue well beyond 2015, at least at certain pricing points.

Given the current structure of the market for natural gas, there is a need for an alternative benchmark to Henry Hub that would, at minimum, more adequately represent pricing in the Northeast region and, at maximum, rival Henry Hub. Unfortunately, such a benchmark may not emerge easily. Henry Hub has the benefit of much greater interconnectivity to multiple large interstate pipeline systems and storage capacity than any of the major Northeastern trading hubs (shown below). Moreover, Northeastern pricing points will remain at risk of basis singularities until local bottlenecks that limit connectivity between various pipeline systems in the Northeast are addressed. This may take time and significant capital.

In the longer perspective, Henry Hub will likely preserve its importance due to its position close to the export LNG outlets on the Gulf Coast that may account for as much as 10 Bcf/d of gas exports already by 2020. However, the emergence with time of a Northeast natural gas pricing benchmark that would rival Henry Hub in relevance and liquidity is logical.

Which Stocks Are The Most Exposed To The Marcellus/Utica Basis Differentials?

  • Antero Resources (NYSE:AR)
  • Cabot Oil & Gas (NYSE:COG)
  • Eclipse Resources
  • EQT Corporation (NYSE:EQT)
  • Range Resources (NYSE:RRC)
  • Rex Energy (NYSE:REX)
  • Rice Energy (NYSE:RICE)

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

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4 Comments on "Is Henry Hub Obsolete As The National Price Benchmark?"

  1. rockman on Mon, 25th Aug 2014 9:39 am 

    “The Henry Hub pricing no longer adequately describes producer economics or producer behavior”. Of course it doesn’t. OTOH it never has. It’s a benchmark…not the price producers sell Marcellus NG. I’ve sold NG thru HH for 40 years and I doubt I’ve sold a $’s worth of gas at the posted prices.

    Apparently the author doesn’t understand the nature of a benchmark. It never represents the actual sales price. One of my typical sales contracts might determine my price as HH – $2.20/mcf (transportation factor) + $0.80/mcf X Btu adjustment factor.

    As pointed out below the price of NG has nothing to do with what the Rockman or any other producers sells into HH for. And typically the HH price isn’t what most of us sell at.

    “Prices of natural gas produced from the Marcellus Shale region could drop below the benchmark Henry Hub price early next year, a new report from the Energy Information Administration says.

    Growth in production from the Marcellus region of Pennsylvania, West Virginia, and Ohio has lowered the spot price of natural gas at the TCO Appalachia trading point in recent years. Forward market prices for natural gas indicate that this production growth will continue, the EIA says.

    The Henry Hub price point is located at Erath, La. A common way to express prices at different locations across North America is the difference (often called basis) between the price at a particular location and the price at Henry Hub, according to the EIA.

    Natural gas prices in the Mid-Atlantic have traditionally been more expensive than Henry Hub, reflecting the cost of moving natural gas from the production in the Gulf region to consumers along the east coast. Increased production from the Marcellus region began changing that relationship in 2011, the EIA says.”

    IOW the price of Marcellus production can be compared to what NG is selling for at the HH benchmark but its price is set by the local market and not what NG is selling for 1200 miles away.

  2. Nony on Mon, 25th Aug 2014 11:24 am 

    I thought it was a good article. I think the writer is perfectly aware of the points Rock made (difference in local markets, etc.) and in fact expounded on them and the specific details of current situation within his article. Instead of this kind of salty comment, it would be more insightful to get into the nuts and bolts of the actual discussion.

  3. rockman on Mon, 25th Aug 2014 2:21 pm 

    Perhaps the title of the article was skimmed over too quickly: “Is Henry Hub Obsolete As The National Price Benchmark?”. Texas and La., which are tied to the Henry Hub benchmark, produce more then 5X as much NG as the #3 state…PA. Texas and La., which tied to Henry Hub benchmark, consume 2X as much NG as CA and 5X as much as NY.

    Yeah, right…the HH benchmark must be on its last breath. LOL. Tossing out ugh a ridiculously hyped and misrepresentative title destroys credibility right off the bat IMHO.

  4. Nony on Mon, 25th Aug 2014 3:14 pm 

    OK, I see your reaction to the title. Fair.

    If you read a little further, this is one of the three bulleted points:

    “•While Henry Hub will preserve its prominence as the key national benchmark, a rival price benchmark in the Northeast may emerge with time.”

    I think the article gives the plusses and minuses and describes an emerging phenomenon.

    Let’s move on though: Do you think PA will pass TX as a gas producer in next 10 years? (I don’t have a strong opinion. Just curious to see what you say). After all, it has already passed LA.

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