Energy Prospectus

Note from Raymond James Equity Research Team:

As we kick off 2025, and especially given the run-up in both crude and natural gas prices, company hedge books have once again become topical. The trend remains the same: hedges continue to shrink across the industry due in large part to pristine balance sheets and more conservative activity plans (relative to pre-COVID). As it stands, crude and natural gas hedges are down ~51%/~23% year-over-year, respectively. If our bullish gas call ($4.00 avg. FY25 and $4.50 avg. FY26) proves accurate, there are going to be a lot of happy management teams (and E&P investors).

The main takeaways when looking at the hedge profile of our E&P coverage:

* 2025 natural gas hedges are slightly less than that of 2024, standing at 24% of total estimated volumes.
* 2025 oil hedges are less than half that of 2024, standing at 13% of estimated volumes.
* Oil strip is dramatically backwardated, while natural gas is in moderate contango. Bullish commodity backdrop and strong balance sheets (~1x leverage) seem to be discouraging hedges.
* Two large caps (EQT and FANG) and three small-cap companies (VTLE, CRGY, CNX) have over 50% of natural gas volumes hedged this year.
* Fourteen companies are going with no oil hedges into the new year. This includes APA, CHRD, COP, EOG, FANG, HES, MGY, NFG, OXY, TXO.

Bottomline: It appears the most upstream companies don't believe that "Drill Baby Drill" will lower oil prices. EQT, FANG, CRGY and VTLE have taken on a of debt recently, which might explain why so much of their natural gas is hedged.

In oil and gas hedging, volumes only do not tell the story.

It makes a big difference if you have hedges in swaps (=sell oil or gas at a pre-agreed price). collars (=sell oil and gas if the price falls outside a pre-agreed range) or if you buy call options or put options.

Diamondback and EQT are presented by Ramond James as examples of companies which have high hedging volumes. However, the net effect of 2025 hedging on Diamondback and EQT will be very different.

Diamondback
Oil hedging
• Diamondback has no oil swaps or collars for 2025. 24% of the oil production in 2025 are protected by long puts, which have a bottom price of $ 55-60/bbl. With a normal WTI range these will end out of the money an all what Diamondback will lose is the premium paid ($ 1.50-1.60/bbl).
Gas hedging
• Diamondback has no gas swaps for 2025. 56% of its gas production is hedged in 2025 costless collars, which have a bottom price of $ 2.30-2.50/MM Btu and a top price of $ 5.45-5.96/Mm Btu. With a normal Henry Hub range of $ 3.00-4.50 MM Btu the collars will end out of the money and Diamondback will win or lose nothing.

My expectation for the 2025 Diamondback hedging result (excluding costs) is nil…. The Diamondback hedging is semantics and has no impact on the net revenue.

EQT
Gas hedging
• EQT has hedged 91% of its 2025 gas production – 45% in swaps and the rest in collars, puts and calls.
• The EQT swaps have a price of $ 3.10-3.70/MM Btu depending in the quarter. If HH would be $ 3.00/MM Btu EQT will gain$ 415 M from the swaps (=4% extra revenue). If HH would be$ 4.00/MM Btu, EQT will lose -$ 555 M from the swaps (=-6% less revenue).
• The remaining 46% of the hedging is in call and puts, which have a limited impact on the revenues (+$ 50 M to -$100 M = 0.6-1.6% of the revenue).

For EQT the hedging results in 2025 can be positive or negative. The net impact on the revenue is 4-6% of the revenue or 10-15% of the net profits.

Hedging in 2025 will have no impact on the Diamondback results but will affect the EQT result.

Thanks Harry. Appreciate the detail.

Good example Harry, Thank you

Reminder: All of my individual company forecast models show how each company's hedges impact their realize oil and gas prices.

Harry is correct that just saying a company has a certain percentage of their production hedged can be misleading. Some of the companies have lenders that require them to hedge a certain amount of their production. It is wise for them to do so.