Missed opportunity: Hedges to reduce first-quarter profit for U.S. shale oil producers

A sticker reads crude oil on the side of a storage tank in the Permian Basin in Mentone, Loving County, Texas, USA, November 22, 2019. REUTERS / Angus Mordant

U.S. oil and gas operators face billions of dollars in hedging losses that will weigh on first quarter results as the recovery in oil prices this year has left dozens of lower-priced sales of their oil. of the market.

Companies such as Cimarex Energy Co (XEC.N) and Concho Resources which blocked prices for some of their volumes when prices rebounded last year to around $ 40 a barrel missed some of the price hike, and Concho owner ConocoPhillips (COP.N) paid millions. dollars to unwind these contracts.

Benchmark U.S. crude prices have doubled from a year ago levels, averaging over $ 58 per barrel for the quarter ended March 31. the coming days.

Dozens of producers have hedged themselves at prices below $ 50 a barrel, according to Andrew McConn, co-head of business intelligence at energy data firm Enverus. His review of 66 producers revealed about $ 7 billion in overall coverage losses.

(For a chart on oil company coverage, click here: https://tmsnrt.rs/3tYf1VS)


Oil and gas producers use hedges as a form of insurance to lock in prices for future production. Hedges protect them from potential price drops and provide guaranteed income. But that can chill the gains of a rising oil market.

This year’s coverage losses will add pressure to keep spending budgets fairly conservative, McConn said, potentially cutting spending on drilling until the covers disappear and companies can get market prices for everything. oil.

Several companies have warned investors about cover losses in the first quarter. Diamondback Energy (FANG.O) is forecasting hedge losses of $ 102 million after selling some of its oil at $ 46.81 a barrel. Cimarex warned of a loss of $ 162 million on oil and gas derivatives.

The unwinding of out-of-the-money hedges acquired in January with Concho Resources reduced ConocoPhillips’ pre-tax profit by $ 300 million, he said in a March filing.

Chesapeake Energy (CHK.O) has hedged some 19 million barrels for 2021 at a price of $ 42.69 per barrel – a figure that represents just over half of its 2020 oil production, according to filings.

Chesapeake declined to comment.


The hedging made sense given the uncertainty in the market last year, said Trisha Curtis, managing director of PetroNerds, an oil and gas consultancy that tracks hedging and derivatives.

Hedging in the $ 40 a barrel range was probably needed, while hedging in the 1950s made sense, Curtis said with the Organization of the Petroleum Exporting Countries (OPEC) last year, noting it could ease the production brakes that drove prices up, she said.

While the $ 7 billion in losses is substantial, oil companies should still benefit from this year’s prices, said John Saucer, of commodity consultancy Mobius Risk Group. Most companies typically cover about half of their volumes.

“If you have the right coverage ratio, you should want to lose money because you are making money on the other part of your portfolio,” Saucer said.

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