Independent oil companies, those that only focus on exploration and production, have the largest percentage their production secured under higher-priced hedging contracts at a time when crude is trading at record lows, a new market survey from the Austin oil field data firm Enverus reveals.
Used to predict revenue and costs, hedging contracts between producers and buyers lock in oil prices anywhere from a month to a year. Some 2.5 million barrels per day of oil production is locked under contracts that pay above $50 per barrel at time when crude is trading at $20 per barrel, Enverus reported.
A price war between Russia and Saudi Arabia has exacerbated a global supply glut of crude oil while shutdowns and closures related to the coronavirus pandemic have cut demand for gasoline and other refined products around the world — sending commodity prices plummeting.
“Hedging is particularly valuable and relevant now,” Enverus analyst Andy McConn said. “Whenever there is price volatility, hedge positions become more relevant.”
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Highest & Lowest Hedging Profiles
Independent oil companies have the largest percentage their production secured under higher-priced hedging contracts at a time when crude is trading at record lows, a new market survey from the Austin oil field data firm Enverus reveals. By contrast, some companies choose not to hedge any of their production.
Laredo Petroleum 96%
Ovintiv 96%
Lonestar Resources 95%
Parsley Energy 90%
Hess Corp 82%
Pioneer Natural Resources 81%
SM Energy 80%
Northern Oil & Gas 79%
Penn Virginia Corp 74%
QEP Resources 74%
Centennial Resource Development 0%
Continental Resources 0%
Magnolia Oil & Gas 0%
Source: Enverus
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Ten publicly traded oil companies have more three-fourths or more of their production locked under hedge contracts that pay $50 per barrel or higher.
Laredo Petroleum, Ovintiv, Lonestar Resources and Parsley Energy have 90 percent or more of the production under those contracts while companies such as Centennial Resource Development, Continental Resources and Magnolia Oil & Gas have none of their production hedged.
Although hedge profile may reduce losses for some companies, they will not last forever.
“Most U.S. exploration and production companies have significant oil-hedge protection through the end of the year, but it largely evaporates by January 2021,” McConn said. “That fact underscores the importance for the oil market to find a path to recovery by the end of the year – preferably sooner.”
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There are several types of hedging contracts but the Enverus survey shows that the most popular type is a swap where the price remains fixed for an agreed period of time.
“A swap ensures guarantees the producer a steady, predictable, and consistent stream of revenue,” said Jesse Lotay, an attorney specializing in hedging for the law firm Jackson Walker.
