Hedge Contracts Expiring | Russell T. Rudy Energy LLC
Hedge contracts enable oil and gas producers to lock in specific prices for their future production. Conversely, these arrangements enable buyers to anticipate a stable supply of energy at a known price. If you are an operator, and think prices are uncertain, or likely to decline in the future, you would be inclined to hedge production. However, if you think current prices are bad, but will likely improve, you probably will not commit yourself to what could be a lower price than you would otherwise realize.
When oil prices were strong, many operators hedged their production. This in turn largely protected them from initial price drops. However, as prices continued to fall, they became reluctant to commit to these prices in hopes of future improvement. Unfortunately, prices continued to fall. A recent article in “World Oil” cites a report by consulting group IHS which indicates that only 14% of 2016 oil production is hedged. This analysis is based on a sample of 51 small, medium and large producers. Further, only 2% of 2017 oil production is hedged. Consequently, more operators are at the mercy of prevailing market prices at the time of production. Hedging activity is inversely correlated with the size of a company: the smaller the company, the more likely it is to hedge.
In the fourth quarter of 2015 small operators had hedged 77% of oil production, but currently this is down to 47%. This places companies with high debt and little hedging, such as Comstock Resources, Approach Resources, and Stone Energy at greater risk.
Among mid-size operators, 43 % of future oil production is hedged. This does not bode well for high debt/low hedging companies such as Ultra Petroleum and Sandridge Energy.
Large U. S. producers have hedged only 6% of future oil production. However, their size, stronger balance sheets, and in some cases vertical integration, makes them at less risk to current depressed prices.
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/01/30/oil-and-gas-companies-face-difficult-year-as-hedging-protections-roll-off-ihs .
