Oil rally drives producer hedging

Tue May 26, 2015 10:24am EDT
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By Mike Kentz

NEW YORK, May 26 (IFR) - A rally in oil prices that has pushed WTI spot levels above US$60 has drawn a spate of hedging activity as producers look to lock in 2016 cashflows.

California Resources Corporation, Cenovus Energy, EP Energy, EQT Corporation, Marathon Oil, Hess Corporation, Gulfport Energy, and Whiting Petroleum all initiated new hedges or added to existing hedges in the first quarter on the back of a US$10 rally from early January.

Several - most notably higher-rated firms such as Marathon and Hess - do not traditionally hedge at all, according to market participants. Most have locked in prices for future delivery at just above US$60 through to 2016 in an attempt to assure funding lines ahead of any potential summer slowdown.

"Increased hedging activity is a sign these firms view the outlook for the market as constructive enough to put down some protection - in a way it is almost a necessary pre-cursor to a pick-up in spending and/or production," said Ryan Todd, E&P equities analyst at Deutsche Bank.

"Once the value of futures contracts used for hedging moves back into a range that's reasonable, it presents an opportunity to lock in cashflow ahead of when lenders revisit the revolvers the E&P firms have in place. Having a strong outlook for the business, even if it does cap the upside, goes a long way in shoring up the risk of a lack of funding."

Futures contracts referencing the expected price of delivery in 2016 - used for hedging or as a hedging benchmark by most corporations - broke through the US$65 range in early May when spot touched US$62.

The breakthrough above these key thresholds allowed some firms to lock in future rates of sale above US$65, essentially a coup for producers wary of dips back down below US$50 that would test profitability and bring future funding capabilities into question.

Such a dip below US$50 had occurred in March, causing a similar but perhaps more frantic rush for protection (see "New oil lows revive hedging", IFR 2075 p63).   Continued...