Rystad Energy - Energy Knowledge House

Commentary

USindies hedging update

US E&Ps have so far hedged 41% of their total guided and estimated 2021 output at an average price floor of $42 per barrel, Nymex WTI equivalent, lower than this year’s floor of $56 per barrel. On average, operators have hedged 43% of their expected 2021 output. Hedging strategies of US upstream operators have taken center stage as a tool that is helping companies cushion their cash flows amid weak oil prices. Rystad Energy has analyzed a peer group of 30 dedicated US light tight oil (LTO) producers, whose collective guided 2020 oil production accounts for 50% of the total expected US shale output. This time, however, the peer group is further limited to operators that have already detailed their 2021 derivatives positions and excludes some that have recently filed for Chapter 11 protection. Of the total, 20 companies had communicated their hedge volumes for 2021 as of early October. These operators account for 32% of the expected 2020 US shale oil production. The analysis includes all contracts, with full or partial floor protection: swaps, collars and three-way collars.

US E&Ps have so far hedged 41% of their total guided and estimated 2021 output at an average price floor of $42 per barrel, Nymex WTI equivalent, lower than this year’s floor of $56 per barrel. On average, operators have hedged 43% of their expected 2021 output. Hedging strategies of US upstream operators have taken center stage as a tool that is helping companies cushion their cash flows amid weak oil prices. Rystad Energy has analyzed a peer group of 30 dedicated US light tight oil (LTO) producers, whose collective guided 2020 oil production accounts for 50% of the total expected US shale output. This time, however, the peer group is further limited to operators that have already detailed their 2021 derivatives positions and excludes some that have recently filed for Chapter 11 protection. Of the total, 20 companies had communicated their hedge volumes for 2021 as of early October. These operators account for 32% of the expected 2020 US shale oil production.

The analysis includes all contracts, with full or partial floor protection: swaps, collars and three-way collars. Collected contracts reference different price strips – WTI Nymex, WTI Midland, WTI Houston and Brent. In Figure 1, we have converted everything to a WTI Nymex equivalent, assuming a spread of $0.30 per barrel for WTI Midland, $0.70 for WTI Houston and $2.50 for Brent versus WTI.

20201016_ShaleUpstream_USindiehedging_Charts_Figure1.jpg

The hedging position of the companies considered shows that so far E&Ps have hedged 45% of their total guided and estimated 2021 output at an average price floor of $42 per barrel in comparison to the 2020 average floor of $56 per barrel. Laredo Petroleum, Parsley, Pioneer and Diamondback hedged a significant amount of their expected oil production against Brent. It is important to outline that the calculated floor in some cases is also an actual price per barrel in a swaps contract. The distribution of the hedged volumes is quite wide. Only three operators – Marathon Oil, Murphy Oil and Ovinitiv – have less than 20% of their expected 2021 oil production hedged. Again, only three – SM Energy, Parsley and Laredo Petroleum – have above 60% of their forecast 2021 output protected. Most others come in between 20% and 60%. Some of the names on the chart, mainly highly leveraged companies, had added hedges in early 2020 to cover a large volume of their expected output, taking advantage of a higher strip price. Laredo Petroleum secured swaps at $49 per barrel Brent for 50% of its expected 2021 crude output. In contrast, Pioneer continued with large volumes secured through three-way collars, only adding an extra ceiling for the purpose of capturing premiums for its 2021 settlements (short calls) despite the expected crude price volatility.

20201016_ShaleUpstream_USindiehedging_Charts_Fig2.jpg

Figure 2 shows the share of the types of contracts for 2021 settlements in the overall portfolio of contracts as of early October in comparison to the previous years. Noticeably, the share of three-way collars has dropped significantly since the spread of Covid-19, accounting only for 17% of the 2021 settlements in comparison to 41% in 2020. This change comes as the collapse in the crude market in early 2020 meant that prices broke the subfloor of most of these contracts, generating only around $10 uplift to the pre-hedged realized price. Interestingly, Occidental has sold a large volume of call options for 2021 settlement, even though these contracts alone are not considered hedging contracts because they have no floor protection. They provide a price ceiling at around $74 per barrel Brent and potentially can be combined with the puts to create a collar or a three-way collar in the future, similar to the operator’s 2020 derivative strategy. That means the share of its 2021 three-way collars might still grow significantly in coming quarters.

20201016_ShaleUpstream_USindiehedging_Charts_Fig3.jpg

While market sentiment for US gas looks brighter in 2021 based on the latest Henry Hub NYMEX futures strip—with average quoted prices breaking $3.00 per MMBtu already for December—most gas producers effectively remain cautiously optimistic. Looking at their hedged positions for 2021, Rystad Energy also analyzed a peer group of 10 dedicated public US shale gas players, whose net production represents over a fifth of the total expected US gas volume in 2020. So far for 2021, these E&Ps have hedged more than 45% of total guided net production, at an average floor price of $2.58 per MMBtu (HH NYMEX equivalent) (Figure 4).

20201016_ShaleUpstream_USindiehedging_Charts_Fig4.jpg

Generally, the gas peer group is also well hedged—though there is still room for additional hedge positions to be layered on in 2021, especially given that this peer group hedged nearly 70% of its 2020 volumes. The average floor price of $2.58 for 2021 remains lower than the $2.70 average for 2020. Notable outliers include Antero (AR), which has hedged most of its production already, as it did in 2020, and at a higher floor price. On the other end, Cabot Oil and Gas, which has historically maintained a low hedging profile, currently remains unhedged for 2021. This perhaps also reflects bullish views on gas prices communicated by the management. Figure 3 captures this analysis but in the context of gas production in 2021 for each of these operators.