Hedged – but Suddenly Unprotected?

| By Mark Young

Evaluate Energy hedging data shows that North American oil producers had hedged over 100,000 barrels of oil per day heading in Q2 2020 under contracts that no longer protect these companies against a low price, with WTI and Brent both hitting 18-year lows last month.

The contracts in question were all in place at year-end 2019 and are all three-way collars. The oil price has now fallen so far that three-way collars cannot offer the protection that, for example, a standard collar or fixed swap derivatives would provide.

This, alongside continuing external pressures related to OPEC, COVID-19 and storage capacities, mean that Q1 results releases cannot come soon enough for investors. These results will hold vital data on the updated hedging positions for all upstream oil and gas hedgers around the world, allowing investors to see how their stocks are handling risk management in such uncertain times. Evaluate Energy will have all this new hedging data as it becomes available.

For more on our hedging data, click here.

“In times of oil price stability, a three-way collar represents an attractive, cheaper option for oil producers,” explains Isabelle Li, Senior Oil & Gas Analyst at Evaluate Energy. “Unlike more expensive standard collar arrangements, which operate between a ceiling price and a floor price, a three-way collar brings in an extra short-put component to the equation, introducing a ‘sub-floor’ price.”

“With a standard collar, a fall in prices below the floor would mean the producer is protected by this floor,” Li continued. “The increased risk in a three-way collar is that if the commodity price index in question falls below this ‘sub-floor’ after already passing the floor price, the producer is no longer protected by the floor.”

Looking at Evaluate Energy data on global hedging positions as of December 31, 2019, we can see that across the WTI, Brent and Argus indexes, over 100,000 bbl/d of oil was hedged for Q2 2020 under three-way collars by 29 North American companies, with the lowest sub-floor prices for any contract against each index was US$40.00, US$45.00 and US$52.85, respectively.

“Similar volumes were hedged for future quarters, with 98,000 bbl/d and 96,000 bbl/d hedged under three-way collars in Q3 2020 and Q4 2020, respectively,” said Li. “Three-way collars represented between 30-32% of all hedged oil volumes by North American producers in each quarter according to year-end 2019 data, all with sub-floors above the current oil price.”

Source: Evaluate Energy Hedging Database

Evaluate Energy hedging data can help you identify the companies are most exposed under these positions. Our data includes hedged volumes under all contract types and the pricing levels involved, including fixed swaps, collars, differentials and more.

Our data looks at each company on a contract-by-contract basis, allowing the full dissection of the total +330,000 bbl/d of oil hedged by 116 North American oil producers in Q2 2020, along with contracts already in place for 2021. This position, which was taken from data available in company results for Q4 2019 will change dramatically once we start to receive Q1 2020 results in a few weeks. Evaluate Energy’s hedging product will be tracking all these changes.

For more on our data, click here.

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