Energy Prospectus

Realized gas prices
In the last few years small operators in the Permian have seen low realized gas prices as a consequence of low Waha gas prices. Realized gas prices at times even went negative. In 2024 the gap between their realized gas prices and the Henry Hub gas prices widened.

From the oil and gas companies that I track, the Permian companies with the largest gap between their realized gas price and the Henry Hub gas price are:
• Ring Energy: -$ 2.49/MM Btu (2023), -$ 3.62/MM Btu (2024).
• Riley Exploration: -$ 2.08/MM Btu (2023), -$ 2.38/MM Btu (2024).
• Vital Energy: -$ 1.38/MM Btu (2023), -$ 1.99/MM Btu (2024).
• Diamondback: -$ 1.21/MM Btu (2023), -$ 1.78/MM Btu (2024).
• Highpeak Energy: -$ 0.96/MM Btu (2023), -$ 1.65/MM Btu (2024).
• Civitas: -$ 0.68/MM Btu (2023), -$ 1.42/MM Btu (2024).

There was hope that after the start of the Matterhorn pipeline (capacity of 2.5 bcf/d) in October 2024, Waha gas prices in the Permian would get a boost This did not happen. The demand for gas export has kept growing due to oil production becoming gassier and due to the start of new non-associated gas projects. The new gas filled up the Matterhorn pipeline capacity. The future Waha gas prices (see chart below) indicate that the issue will not be solved until late 2026

New pipeline capacity
In 2026 a series of new gas pipelines and compressor stations will come online which will boost the export capacity. Projects with a potential start-up date in 2026 are:
• Gulf Coast Expansion – compression - 0.6 bcf/d.
• Apex pipeline – 2.0 bcf/d.
• Rio Bravo Pipelines – 4.5 bcf/d.
• Blackcomb pipeline -2.5 b f/d.
• Hugh Brinson pipeline (=Warrior) – 1.5 bcf/d.

The new export capacity explains why in 2027 the discounts between Waha and Henry Hub futures may be reduced. Note that not all projects are firm.

Main beneficiaries
With improving Waha gas prices in 2027, the companies which will benefit most are those companies which are seeing the largest discounts in 2023 and 2024 and which also have significant gas volumes.

With better gas prices for some companies the eps in 2027 can increase significantly. Assuming a remaining delta of -$ 1.00/MM Btu (=pipeline tariff) between Waha and Henry Hub in 2027, the eps increases are:
• Vital Energy: Eps +$ 1.89 (+20.7%) – from $ 9.11 to $ 11.00.
• Ring Energy: +$ 0.06 (+15%) - from $ 0.40 to $ 0.46.
• Riley Exploration: eps +$ 0.47 (+7.2%) - from $ 6.50 to $ 6.97.
• Civitas: Eps +$ 0.61 (+6.7%) - from $ 9.14 M to $ 9.75.
• Highpeak Energy: Eps +$ 0.06 (+6.0%) - from $ 1.01 to $ 1.07.
• Diamondback: Eps +$ 0.75 (+5.1%) – from $ 17.57 to $ 18.32.

Conclusions
Companies like Vital Energy (+20.7%) and Ring Energy (+15.2%) may see major benefits in 2027 from new gas export capacity from the Waha area.

Not all pipelines are firm, projects delays can occur, and strong gas prices may trigger new gas projects in the Perman. Therefore, I have not built the improved gas prices into my ranking model. I will keep the improved gas prices as an upside for the relevant companies.

Hi Harry,
excellent post. Good information.
Thank you,
Klaus

For upstream companies in our three model portfolios, you can find their production mix on Tabs 2 and 3 of the recently updated Sweet 16 Summary Spreadsheet. It now shows the estimated production mix for 2025.

You can also find the production mix and their realized oil, natural gas and NGL prices at the bottom of the forecast/valuation models for each company.

"Realized" commodity prices are net of regional differentials and the impact of their hedges.

Some companies show realized prices for natural gas and NGLs net of gathering, transportation & processing fees (i.e. - Ring Energy), which is why some of them have negative gas prices. Other companies show GT&P expenses as a separate line item on their income statements.

Bottomline: For the best exposure to higher natural gas prices look at companies outside of the Permian Basin (AR, EQT, RRC, CRGY, BSM)