By February 2, 2016 Read More →

American oil/gas producers face difficult 2016 as hedging protections end

Large E&Ps hedged just 6% of oil production at $53.85/b, 16% of gas at $3.58 per MCF, making them most exposed of US peer groups


Paul O’Donnell, principal analyst at IHS Energy

As oil prices continue to decline, North American exploration and production companies have hedged just 15 per cent of their total production volumes for 2016, including 14 per cent of oil and 18 per cent of natural gas, according to a new study from IHS.

The lack of hedging leaves the companies largely exposed to current depressed market prices.

According to the IHS Energy Comparative Peer Group Analysis of North American E&Ps, production hedging for the group of 51 companies studied will fall even more significantly in 2017, when just 4 per cent of total production will be hedged, including only 2 per cent of oil and 7 per cent of gas, IHS says.

“Companies hedge their production to provide a level of protection against oil and gas price fluctuations, and in 2016 and 2017, we see a significant decline in hedging protections, which means more companies are exposed to the current depressed prices and market conditions,” said Paul O’Donnell, principal analyst at IHS Energy and author of the hedging analysis.

The small U.S. E&Ps have the highest level of hedging protections, the IHS report, said, with 47 per cent of their oil production hedged at $74.31 per barrel, and 46 per cent of gas production hedged at $3.43 per thousand cubic feet (MCF), compared with 77 percent of oil at $83.15 per barrel, and 58 percent of gas at $3.67 per MCF in fourth-quarter 2015.

Within this group, IHS said, Comstock Resources, Approach Resources, and Stone Energy are among the most at risk of financial stress owing to high debt and little hedging.

“For most companies in the sector, 2016 is going to be another very tough year, as plunging revenues lead to balance sheet deterioration, and financial pressures mount,” said O’Donnell.


Stock market volatility

The midsize US E&Ps have hedged 43 per cent of oil production at $60.54 per barrel and 26 per cent of gas production at $3.34 per MCF. High-debt companies with little hedging include Ultra Petroleum and SandRidge Energy.

Reuters reported Jan. 25 that SandRidge Energy is exploring debt restructuring options, according to people familiar with the matter, as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices.

The large U.S. E&Ps have hedged just 6 per cent of oil production at $53.85 per barrel and 16 per cent of gas at $3.58 per MCF, making them the most exposed of the U.S. peer groups, IHS said.

The majority of companies in this group are unhedged in 2016 and 2017, although their balance sheet strength is superior to that of their smaller counterparts, offering a bigger financial cushion.

The Canadian E&Ps have hedged just 9 per cent of oil at C$78.54 per barrel and C$3.87 per MCF, IHS said. Penn West and Canadian Natural Resources are the most exposed higher-debt companies.

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