Just 14% of 2016 production hedged

With oil and gas prices holding lower for longer, many operators are looking for ways to protect as much of their production as possible. Hedges have offered some level of protection to producers through the commodity price rout, but with just an estimated 14% of production hedged in 2016, according to Reuters, producers are anxiously waiting for prices to reach a point where new hedges could offer protection through the continued downturn.

The recent upturn in crude oil prices following the announcement of an OPEC and non-OPEC coordinated production freeze prompted a number of producers to begin inquiring about new hedges. On Thursday, the 2017 WTI price strip rose as high as $43.55 per barrel, prompting a surge in trading.

Trading volumes in over-the-counter oil swaps was more than five times higher than the past three days combined, according to swaps data from the Depository Trust & Clearing Corp.

Traders indicated that producers were showing an increased interest in acquiring new hedges near $45 per barrel, below the $50 mark, which was thought to be a psychological barrier previously. While traders indicated that the interest had so far come in the form of inquiries and not execution, the increased activity reflects the growing investor and lender pressure to safeguard future capital requirements.

“The $45 is breakeven for a lot of producers,” a trader told Reuters. “It’s not about making a profit, it’s about staying alive.”

Companies looking to strengthen hedge book

Denbury Resources (ticker: DNR, Denbury.com) said in its fourth quarter and year-end financial release that the company has entered into additional hedges. “We now have hedges covering an average of 27,000 [BOPD] in the third and fourth quarters at an average price of $40.66 per barrel … we are taking steps to ensure we have liquidity and resources to weather this storm,” the company said.

Pioneer Resources (ticker: PXD, PXD.com) CEO Scott Scheffield said he was looking at the current environment as an opportune moment to lock in new hedges. With talk of declining shale output or supply curbs, “you’ve got to use events like that to put hedges in the marketplace,” he said. Pioneer has approximately 85% of 2016 production hedged, making its hedge book one of the strongest in the industry.

Matador Resources (ticker: MTDR, MatadorResources.com) said it has added to its hedges over the past two week. It now has 43% of its estimated 2016 oil output hedged at weighted average floor and ceiling prices of $44 and $66.


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