Hedg­ing on oil, gas

As con­tracts ex­pire, en­ergy com­pa­nies faceweaker fi­nan­cial gains

The Denver Post - - BUSINESS - By Aldo Svaldi

One rea­son the huge drop in oil and gas prices hasn’t done more dam­age toColorado’s econ­omy is that many pro­duc­ers had locked in higher prices.

Those hedges, along with de­clin­ing pro­duc­tion costs, al­lowed en­ergy pro­duc­ers to sell what they pulled out of the ground prof­itably de­spite a 70 per­cent drop in spot oil prices from mid- 2014 lev­els.

As more of those hedges ex­pire, how­ever, pro­duc­ers are find­ing less- fa­vor­able con­tracts avail­able, and more of them are skip­ping price pro­tec­tions en­tirely.

If prices re­main low, that risky move could leave them in the same predica­ment as some­one caught in freez­ing weather with­out a coat.

“I think it would be pru­dent for com­pa­nies of all sizes to main­tain some level of hedg­ing,” said Paul O’Don­nell, a prin­ci­pal an­a­lyst at IHS En­ergy, which put out a re­port Fri­day look­ing at the hedges of 51 com­pa­nies.

Only 15 per­cent of to­tal U. S. pro­duc­tion vol­umes are hedged in 2016 and that drops to 4 per­cent by 2017. IHS es­ti­mated about 28 per­cent of U. S. oil and gas pro­duc­tion was hedged in 2015.

The largest pro­duc­ers have only 6 per­cent of oil pro­duc­tion hedged, while mid­size firms are at 43 per­cent. The small­est firms have 47 per­cent of this year’s oil pro­duc­tion hedged at $ 74.31 a bar­rel, mean­ing they have con­tracts to sell at that price even though oil is trad­ing around $ 33. But that is down­from77 per­cent of oil pro­duc­tion last year at $ 83.15 a bar­rel, the IHS study said.

Big firms are­more likely to have a strong bal­ance sheet, the fi­nan­cial equiv­a­lent of a thick layer of fat, to help sur­vive a cold spell. If they be­lieve higher prices are com­ing, they may be in­clined to pass on hedges.

Small pro­duc­ers, by con­trast, are more likely to bor­row­money to fund their op­er­a­tions. Hedges help lenders guar­an­tee that enough cash will come in to re­pay loans.

O’Don­nell pro­vided some in­for­ma­tion on oil and gas pro­duc­ers based or ac­tive in Colorado.

Den­ver- based An­tero Re­sources is the state’s best- hedged pro­ducer. All of its 2016 nat­u­ral gas pro­duc­tion is hedged at $ 3.92 per thou­sand cu­bic feet ver­sus the go­ing price of $ 2.30, O’Don­nell said.

PDC En­ergy has about 43 per­cent of its oil pro­duc­tion hedged at a high price of $ 85 a bar­rel, mak­ing it the best- pro­tected on the crude side in Colorado.

Whiting Pe­tro­leum has about 45 per­cent of its oil pro­duc­tion hedged this year at around $ 50 a bar­rel, while Bill Bar­ret­tCorp. has 55 per­cent hedged at around $ 80 a bar­rel.

Anadarko Pe­tro­leum, the state’s largest pro­ducer, has about 26 per­cent of its oil pro­duc­tion hedged at $ 52 a bar­rel. It is un­hedged on nat­u­ral gas, O’Don­nell said.

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