Liquefied natural gas (LNG) contracts may increase cash flow volatility for some U.S. and Canadian exploration and production (E&P) companies due to firm liquefaction capacity commitments tied to international gas prices, according to a new report by Fitch Ratings. This exposure is manageable, but greater contractual commitments could pressure credit quality if issuers do not adopt more conservative financial structures, especially during low international-to-domestic natural gas (natgas) price differentials. Fitch notes that E&P companies’ credit ratings remain unaffected by LNG sales contracts, given their limited exposure relative to overall production and existing ratings headroom.

Only a few natgas producers are exposed to liquefaction contracts associated with LNG projects approved for development, including APA Corporation (BBB-/Stable), ARC Resources Ltd., Coterra Energy Inc. (BBB/Stable), EOG Resources, Inc., and Tourmaline Oil Corp. Over the past decade, natgas prices in large European and Asian LNG importing markets have significantly exceeded U.S. Henry Hub (HH) and Canadian AECO natgas prices. However, North American companies might see neutral to negative incremental profits from LNG sales versus HH sales from 2027 onward based on the current forward curves and the terms of each specific contract.

Fitch anticipates partial convergence of North American and international natgas prices within a few years due to rising global LNG liquefaction capacity. On the other hand, companies with LNG sales contracts could see extraordinary profits from occasional TTF and JKM price spikes. Effective management of cash flow volatility and preparation for weaker pricing through conservative capital structures can help E&P companies balance this volatility. North American LNG production capacity is expected to more than double by 2030, potentially affecting domestic prices and market volatility.
Source: Fitch Ratings