Effects of Rising Natural Gas Prices

The market price of natural gas is currently near $8.00 per MMBtu, following a recent surge to above $9.00 per MMBtu, which was the highest price since 2008. The current forward NYMEX strip shows an average natural gas price close to $6.15 per MMBtu over the next 18 months.

Forward gas prices are primarily driven by the following factors:

  • Current and expected production levels
  • Forecasted storage levels
  • Industrial and international demand
  • Weather expectations and availability of alternative fuels

However, natural gas production has not always been equally responsive. Supply chain issues, the ability to secure labor and crews, and a general hesitancy of producers are collectively holding back the drilling of new wells and completing previously drilled wells. And while higher natural gas prices are good for producers and marketers, it brings attention to certain issues for companies that may have been on the “back burner” since natural gas prices had been exceptionally low during 2019 and 2020.

Of course, higher gas prices result in higher net income, improved cash flow, higher margins, more easily met covenants, improved liquidity, increased availability to capital resources and improved credit ratings, among other benefits. Companies will need to weigh decisions regarding capital expenditure levels, debt reduction and dividends, to name a few.

In addition to cash flow management, higher natural gas prices bring up the following accounting and audit concerns:

  • Receivables will grow and bad debts will need to be considered.
  • Customer credit limits and credit worthiness will need to be revisited.
  • Planning for and explaining hedging losses and increased payments to hedge counterparties will be required.
  • For public companies, additional MD&A disclosures may be needed.
  • Income tax provisions will need to be monitored with the higher pretax income.
  • Impairment testing becomes less likely to result in impairment charges with the higher future prices and estimated cash flows.
  • Reported reserve quantities may be impacted.

There’s certainly a lot to take in and understand. If you have questions surrounding the current natural gas pricing environment, feel free to contact your Schneider Downs consultant.

About Schneider Downs Energy & Resources Services

The Schneider Downs Energy & Resources industry group provides specialized financial advice and services to our clients in the oil and gas, mining and aggregates, forest products and alternative fuel and energy industries throughout the Columbus and Pittsburgh regions. Our extensive knowledge of industry issues enables us to provide proactive audit, tax and management consulting services.  

To learn more, visit our Energy and Resources Industry Group page. 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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