Prices across the so-called Haynesville play in northwestern Louisiana and northeastern Texas have been rising, but the basis discounts have expanded.

Hedging these prices requires care.

Below, we show two the evolution of basis -- the difference between the local price and the price for Henry Hub (NYMEX futures) -- for two different Haynesville locations. Columbia Gulf Mainline is more consistent with pricing on the eastern edge of the play, while NGPL TxOk is priced based on deliveries near the western edge (call it Carthage, TX for convenience).

Note how both locations have seen basis deterioration in the first 3 1/2 months of this year. The slippage is mostly concentrated in summer prices, rather than winter prices. We don't think gas producers are crying much over this though. We'll explain below.

The weakness coincided with extreme strength in Henry Hub

A sharp rally in NYMEX Henry Hub prices take the sting out of the basis weakness. The overall price in the Haynesville has expanded. The chart below shows Henry Hub's rally started just as the basis weakness emerged. In fact, the basis weakness is likely related to what happened at Henry Hub. First, higher prices encourage higher production. Second, pipeline capacity south out of the Haynesville was already approaching capacity, so discounts become more pronounced.

The better-than $1 rally in Henry Hub more than offsets the meager losses in basis discounts.

What to do?

If a producer wants to take hedge these high prices, there are two steps, and both are important.

If your price formula for your gas is a locational price, such as one of the Platts Inside FERC locations, a complete hedge requires:

  • Short position in swaps, or an options structure (puts, collars) on NYMEX natural gas
  • Short position in basis, which is the difference betwen the IFERC fixed price (e.g. NGPL TxOk, Columbia Gulf Mainline) and NYMEX

For more explanation, send us a note to research@aegis-hedging.com.