Hedging on oil, gas
As contracts expire, energy companies faceweaker financial gains
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.