Why Producers Hedge | Russell T. Rudy Energy LLC
A hedge takes place when one party agrees to sell a volume of future production at a specified price and the other party agrees to buy it. Every party to every agreement has its own reasons for doing so. However, a recent article by Mark Young in “Oil Voice”, gives a clear and concise summary of the reasons oil and gas operators enter into such agreements.
Hedges can cover production of oil and gas for months, or even years out into the future. They provide the producer with certainty as to future cash flows for a specified period of time. On the other hand,the company has to forego any price appreciation in excess of the agreed upon amount.
Some companies might value the certainty of future cash flows over any upside price potential. This is especially true of companies who are committed to huge capital outlays as part of new projects. Hedges enable the operator to proceed with the certainty of knowing what future cash flows will be. This can also be reassuring to lenders, vendors, contractors etc.
Some companies, such as super-majors ExxonMobil, Chevron, and Shell, place great value on stable, predictable dividends, upon which many of their shareholders rely. Hedging enables these companies to rest assured that regardless of future price swings, they will be able to pay their dividends and stabilize their stock prices.
At the other end of the spectrum, some entities are so financially challenged that they could not survive a significant price downturn. In these cases, hedges can keep them afloat regardless of future prices. Others might not be able to access capital markets by selling stock or debt. For them, hedging can be their only source of financing.
It should be noted that not all companies opt for hedging. A company’s policy toward hedging can provide insight into its attitude toward price risk.
To read the article in its entirety, please go to https://oilvoice.com/Opinion/5253/Why-do-oil-and-gas-companies-hedge .
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