Hedging Strategies in Natural Gas: Swaps, Costless Collars, and Three-way Collars
- Timothy Beggans
- Nov 25, 2025
- 2 min read
Natural gas producers operate in a landscape shaped by weather volatility, LNG-driven baseload demand, and shifting production growth. In this environment, hedging isn’t a luxury—it’s fundamental risk management. While structures evolve with market conditions, three tools dominate E&P portfolios: swaps, costless collars, and three-way collars. Each carries a different balance of protection, opportunity, and complexity.
Swaps
The most widely used tool—typically 60–70% of total hedge volumes. A swap locks in a fixed sales price (e.g., $3.50/Mcf), replacing floating revenue with certainty. Lenders favor them because they de-risk cash flow, making them ideal for debt-heavy producers or those funding multi-year drilling programs. The tradeoff is familiar: perfect downside protection but forfeited upside during strong rallies.
Costless Collars
Often 20–30% of hedging programs. By pairing a purchased put with a sold call, producers build a price band—commonly something like $3.00 to $4.50/Mcf—at little or no upfront cost. Collars remain popular when volatility is moderate and producers want partial upside participation without the rigidity of swaps. The downside: profits are capped above the call, and the floor is typically weaker than a full swap.
Three-Way Collars
Generally 10–20% of hedge structures among producers willing to accept incremental risk. A three-way collar adds a second sold put below the protected floor (e.g., long put $3.50, short call $5.00, short put $2.50). This lowers cost and raises the ceiling, giving producers more room to benefit from rallies. The compromise: exposure reopens if prices crash below the lower strike.
Most E&Ps hedge 45–55% of production overall, balancing protection with the need to preserve upside in a rising-price environment. As 2025 LNG demand increases and baseline volatility grows, the mix of these tools is becoming more strategic—not just defensive.
What structures are shaping your risk management strategy in today’s market?
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