Natural gas producers are hedging their bets on 2010 commodity prices. The E&Ps covered by Morgan Stanley’s Stephen Richardson, senior oil and gas analyst, have so far hedged about 7 billion cubic feet per day (Bcf/d) of 2010 production—about 34%—compared with 5.5 Bcf/d or 23% at this time last year.

Until the outlook for commodity prices improves, Richardson expects most E&Ps to budget to spend within cash flow in 2010. More conservative drilling programs could result.

The high hedge ratios for 2010 may also signal producers’ reluctance to sell forward additional volumes. Both trends would put positive pressure on 2010 pricing in contrast to historic producer selling pressure, says the analyst.

The most aggressive hedgers are companies with longer-term capital programs and partner commitments, such as Anadarko Petroleum Corp., Noble Energy Inc. and EnCana Corp., which have hedged 57% of production for 2010 compared with 17% for the same period last year. These ramped-up hedging programs will improve the companies’ cash-flow visibility and protect their 2010 spending plans, says Richardson.

In contrast, companies with more positive 2010 outlooks, such as Chesapeake Energy Corp. and EOG Resources Inc., have limited hedging activity or have monetized a portion of 2010 hedges with the expectation that they will have another chance to lock in higher prices.

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