Even as prices plummet, good hedging may help some producers through the lean times
"Rather than wait for their price insurance to run out, many companies are cashing in on well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals, reports Reuters.
Currently, it is unclear which companies are trying to revamp their hedges since that information is not likely to be disclosed until quarterly earnings reports are released in late January, but many could use hedges to protect their operations longer than expected.
Many in OPEC had hoped that by keeping production steady, the market would force out higher cost shale production in the U.S. “There are companies which are hedged until the beginning of the year or until the end of the year, so we need to wait at least until the first quarter to see what is going to happen,” United Arab Emirates Energy Minister Suhail Bin Mohammed al-Mazroui said.
These comments were made on the basis of quarterly reports from several months ago, however. With prices showing no sign of climbing back up, some firms have put on new hedges that will help prevent their revenues from falling further. “OPEC should not expect to see any impact on U.S. shale growth in the first half of the year and the impact in the second half is being attenuated significantly by producer hedging,” says Ed Morse, global head of commodities research at Citigroup.
While the proportion of oil companies actually executing these deals is not that high, the deals thus far have been large in terms of volume and dollars, says Craig Breslau, who heads the energy derivatives marketing desk at Societe Generale in Houston, which has been involved in some restructuring transactions.
According to their last filings, oil companies such as EOG Resources Inc. (ticker: EOG), Anadarko Petroleum Corp. (ticker: APC), Devon Energy Corp. (ticker: DVN) and Noble Energy Inc. (ticker: NBL) had hedged some of their 2015 production at prices of $90 a barrel or more.
The net short position of oil producers and other non-financial companies in U.S. crude oil futures and options markets – used as a rough gauge of hedging activity – has grown to more than 77 MMBO last week from 15 MMBO in August.
For many companies that set up “in the money” hedges prior to the slump, the downturn offers a chance to cash in or extend their protection.
For example, a company that had sold swap contracts to hedge a part of its 2015 production at $90 a barrel – essentially shorting forward oil prices to guard against a drop – could buy them back now at around $57 for a profit of about $33 a barrel.
Some companies are using these profits in order to protect themselves against further market slide by buying swaps and options pegged closer to current market prices.
With December 2015 put option for $60 a barrel now trading at around $9 a barrel, swaps cashed in now could buy a producer nearly four times more protection at that price.
So far only two companies have publicly confirmed winding down their profitable hedge books.
Bakken shale oil producer Continental Resources (ticker: CLR) profited to the tune of $433 million by liquidating its hedges in September – a move that left the firm exposed to a further $20 slump, though it is not clear whether it has set up new hedges since.
On Tuesday, American Eagle Energy (ticker: AMZG) announced that it sold off its 414,000 barrels of oil hedged at $89.59 a barrel through last December for a profit of $13 million to improve its liquidity – even as the firm said it would have to stop drilling until prices improved."
