Constructive gas fundamentals brighten outlook for some US oil-focused E&Ps

Without especially supportive crude prices, some oil-weighted producers are drawing investors' attention to the value of their natural gas production as Henry Hub forward prices gain and retain strength.

Multi-basin operators including Devon Energy and EOG Resources saw gas price realizations rise during Q4 2024 and plan for higher volumes in 2025, with executives outlining supportive fundamentals in tightening storage balances and rising LNG feedgas deliveries.

"Although today, our capital is largely allocated to oil projects driven by returns, the associated gas production and untapped natural gas resource underlying our acreage position provides a significant upside opportunity," Devon Energy CFO Jeff Ritenour said Feb. 19 during the company's quarterly earnings update.

Production, pricing rise

Devon reported full-year 2024 gas production of just under 1.2 Bcf/d, most of which came from the Delaware Basin. This year, the company expects to produce about 1.34 Bcf/d at the midpoint of its guidance.

Realized gas prices increased for Devon during Q4, nearly tripling quarter over quarter to $1.30/Mcf on average before accounting for hedges. The company expects gas revenue to more than double year over year in 2025, according to Ritenour, who said Devon's presence in plays other than the Permian and its ability to move Delaware gas out of the basin advantage the producer relative to others that do not have much exposure to markets outside of Waha Hub.

"There's reason for optimism vs. last year, which was dreadful for regional gas pricing -- which then flowed through balance sheets and reserve reports," Subash Chandra, an analyst with Benchmark, said March 5 via email. "It will be 'free money' in '25."

As cold wintry weather intermittently tightened fundamentals, spot gas at Waha averaged $2.67/MMBtu over the last two months, a tremendous improvement over the sub-zero prices seen during much of last year, according to data from Platts, part of S&P Global Commodity Insights.

However, prices tanked in recent days, falling to near $0 before regaining value and reaching $1.06/MMBtu on March 5, Platts' preliminary price report showed.

Devon sells a large volume of its gas supply at Houston Ship Channel, where cash prices have been 33% higher on average than Waha's since early January, Platts data showed.

"In the Anadarko Basin, our gas has access to Southeastern markets, which have recently traded at a premium to Henry Hub prices as more and more companies point their molecules to the Gulf Coast," Ritenour also said Feb. 19.

Similarly, Jeff Leitzell, EOG's chief operating officer, recently said that diverse marketing will limit the company's exposure to Waha Hub pricing to 5%-7% of total gas sales this year. EOG expects US gas production of 1.95 Bcf/d in 2025, up 13% from approximately 1.73 Bcf/d in 2024, the producer announced.

On pricing, the company reported an average Q4 pre-hedged gas price of $2.39/Mcf, its best quarter of 2024.

"For 2025, we expect additional support for prices from ongoing demand increases from natural gas power generation and the start-up of several LNG facilities," EOG CEO Ezra Yacob said during the company's Feb. 28 earnings call.

Volatility, Permian constraints

Prompt-month NYMEX WTI crude futures have fallen solidly below $70/b in recent trading, with the April contract trading down nearly 3% in the afternoon of March 5 to $66.33/b, intraday data from CME Group showed.

In a recently updated short-term global oil outlook, S&P Global Commodity Insights analysts said they expect WTI to average $66/b in 2025. "The monthly average highs of the year are behind us," they wrote.

Meanwhile, after topping out around $4.51/MMBtu in the morning, near-month Henry Hub futures moderated but were still up 8-9 cents in the afternoon of March 5 to $4.44, CME Group data showed.

Asked during a recent conference call about the gas curve, SM Energy CEO Herbert Vogel said the company is satisfied with the returns of its current liquids-focused strategy and that there is "just less volatility in it" relative to what SM would expect to see if it drilled for more gas. The producer operates in South Texas, as well as the Midland and Uinta basins.

Pure-play operator Permian Resources, which reported a pre-hedge gas price of 87-cents/Mcf for Q4 2024, needs more transportation capacity to improve its gas revenues, Permian Resources Co-CEO James Walter said.

"I think kind of optimizing our realizations over the next decade is at the very top of the strategic priorities list, but I think you'll see that more in '26 and '27 than you will in 2025," Walter told analysts during a Feb. 26 quarterly earnings call.

Several large Permian gas pipelines are scheduled to come online next year. During the prior quarterly call, Walter said the company is contemplating buying into future pipelines.