U.S. shale firms' first-quarter hedging rush may squeeze margins, spur output

Tue Jul 5, 2016 4:56am EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Catherine Ngai

(Reuters) - As oil prices began recovering from 13-year lows early this year, U.S. shale producers ramped up their hedges against another slump on a scale unseen for at least a year, a Reuters analysis of company disclosures shows.

A review of disclosures by the largest 30 U.S. shale firms showed 17 of them increased their hedge books in the first quarter, the most at least since early 2015.

Several, including EOG Resources Inc (EOG.N: Quote) and Devon Energy Corp (DVN.N: Quote), two of the biggest shale companies, secured significant protection of future earnings for the first time in at least six months.

A greater volume of hedged production typically indicates more drilling activity ahead as producers that locked in prices for a sizeable part of their output ensure enough cash flow to sustain or increase production.

What makes the outlook more complicated this time is the fact that oil companies, fearing the rally could fizzle, locked in sales at levels around $10 a barrel below both current prices and break even levels for some producers.

For those producers the concern is that their margins will suffer if service costs rise as activity picks up.

It is less clear how it will affect production, though most analysts expect more supply.

Michael Cohen, head of energy commodities research at Barclays in New York, believes hedges allow producers to plan better even if they secured prices below present levels just below $50 a barrel.   Continued...

A pump jack operates at a well site leased by Devon Energy Production Company near Guthrie, Oklahoma September 15, 2015.   Picture taken September 15, 2015.  REUTERS/Nick Oxford