Hedging Protections for North American Exploration and Production Companies to Plunge in 2016; Picture Isn’t Pretty, IHS Says
Just 11 percent of total 2016 E&P production volumes are hedged;
smaller, highly leveraged companies risk financial stress
Oil and gas hedging protections for North American exploration and
production (E&P) companies will plunge in 2016 to just 11 percent of
total production volumes, leaving many E&P companies at high risk of
financial stress, according to new energy company performance analysis
from IHS (NYSE: IHS), the leading global source of critical information
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The IHS Energy North American E&P Peer Group Analysis: Hedging
Protection Set to Plunge in 2016 assessed the amount of oil and gas
hedging protections in place for 48 small, midsized and large North
American E&P companies for the second-half of 2015 and full year 2016.
Overall hedging for second-half 2015 was largely unchanged from the
previous IHS analysis offered earlier this year--the North American E&Ps
have 28 percent of total production hedged for the remainder of 2015.
The weighted-average hedged prices the group has in place for 2016 are
$69.04 per barrel of oil and $3.83 per thousand cubic feet (MCF) of gas.
The small and mid-sized E&Ps increased 2016 hedging the most during the
first-half of 2015, while the large E&Ps remained mostly unhedged.
“The North American E&Ps remain largely exposed to low prices in 2016,
with just 11 percent of their total production hedged for the year, at
hedged prices significantly below those locked in for 2015,” said Paul
O’Donnell, principal equity analyst at IHS Energy and author of the
report. “For the smaller companies, the combination of less hedging and
lower oil prices does not paint a pretty picture for 2016. Companies
that missed the opportunity to lock in relatively higher oil prices
during the second quarter of 2015 will face pressure to curtail drilling
activity and CAPEX in order to avoid further balance sheet
O’Donnell said IHS expects capital spending for the North American E&P
group will drop 25 percent in the second-half 2015, as compared with the
first-half of 2015, from approximately $60 billion to $45 billion. The
small North American E&Ps have hedged 25 percent of estimated 2016 total
production and continue to have the weakest balance sheets, noted the
IHS report. With high debt and little hedging, EXCO Resources and
Comstock Resources are at risk of serious liquidity issues if low prices
The midsize E&Ps have hedged 26 percent of estimated 2016 total
production. High-debt companies with low hedge protection in 2016
include SandRidge Energy and Ultra Petroleum, which are among the most
at risk of additional financial stress. Pioneer Resources is well-hedged
in 2016 and has lower debt than its peers. This has granted the company
greater flexibility in its future spending plans and the company now
expects to ramp-up drilling activity to its pre-oil price crash levels.
“The large North American E&Ps have hedged just six percent of 2016
production and will rely more on their stronger balance sheets to
weather the low prices,” O’Donnell said. No oil-weighted large E&Ps have
any significant hedging in place for 2016.”
The sector is busy cutting costs, and IHS believes that companies can
now earn a similar rate of return at $60 per barrel that they used to be
able to generate at $90 per barrel. “The rebound in oil prices during
the second quarter created a window of opportunity for operators to lock
in 2016 oil volumes at stronger prices,” O’Donnell said.
High-debt companies, including Halcón Resources, Penn Virginia, Bill
Barrett and Whiting Petroleum added the most oil hedging for 2016,
taking advantage of the relative higher prices during second quarter
2015, said the IHS report. The recent drop in oil futures prices
suggests that operators will be unable to lock in new hedging volumes at
attractive prices. Futures prices for West Texas Intermediate (WTI) oil,
as of 29 September 2015, do not currently reach $60 per barrel between
now and 2020.
“Those that missed these comparatively higher prices in the second
quarter will likely be exposed to market prices next year, while those
companies that layered in additional hedging appear to have made the
correct choice,” O’Donnell said.
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About IHS (www.ihs.com)
IHS (NYSE: IHS) is the leading source of insight, analytics and
expertise in critical areas that shape today’s business landscape.
Businesses and governments in more than 150 countries around the globe
rely on the comprehensive content, expert independent analysis and
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develop strategies with speed and confidence. IHS has been in business
since 1959 and became a publicly traded company on the New York Stock
Exchange in 2005. Headquartered in Englewood, Colorado, USA, IHS is
committed to sustainable, profitable growth and employs about 8,800
people in 32 countries around the world.
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