US producers build up sales hedges as oil falls
Cash flows and capital spending protected even if crude price continues to slide
US independent oil companies have used derivatives to protect much more of their expected revenues against a fall in crude prices than they had a year ago, helping them sustain capital spending and production even if the market continues to weaken.
Filings from the leading US exploration and production companies show they have hedged the revenues from about 27 per cent of their expected 2017 oil production, according to Wood Mackenzie, the research firm. This time a year ago, they had protected just 17 per cent of their revenues for 2016.
Crude prices jumped in the final two months of last year as 13 Opec member countries and 11 non-members agreed to cut production, and US companies were quick to take advantage by locking in those levels.
In the fourth quarter of 2016, the 33 small and midsized oil companies surveyed by Wood Mackenzie put on hedges for 648,000 barrels per day of oil production, almost four times as much as they hedged in the equivalent period of 2015.
The hedges, which include swaps and collars using options, typically have strike prices of $50-$60 per barrel of benchmark Brent crude, and an average price of $54. That compares with an average strike price of $42 per barrel for new contracts in the first quarter of last year.
Anadarko Petroleum and Apache, two of the larger independent oil producers that have assets offshore as well as in US shale reserves, were the most active in the fourth quarter, accounting for about 28 per cent of the oil hedges taken on in the quarter.
Andrew McConn of Wood Mackenzie said that if oil prices continued to decline after their $5-a-barrel drop this month, companies that had hedged would be better placed to stick to their capital spending plans.
The number of rigs drilling the horizontal wells used in shale oil production has more than doubled from its low point last May, and recorded another strong increase last week, rising 13 to 543, according to Baker Hughes, the oilfield services group. Many companies have been telling investors that they plan to increase production this year.
The US government’s Energy Information Administration estimates that December was the low point in onshore oil production for the “lower 48” states of the US, and it expects that output to grow steadily through 2017.
Companies producing in the shale oil regions of the US have cut their costs sharply since the crude price slide that began in the summer of 2014.
Hess, for example, said last month that it had slashed the average cost of drilling a well in the Bakken formation of North Dakota from $7.5m in the first quarter of 2014 to $4.6m in the final quarter of 2016.
However, Wood Mackenzie still says the US industry needs oil at about $55-$60 per barrel to sustain the increase in capital spending and production.
Mr McConn identified EOG Resources and Pioneer Natural Resources as “outliers” that could continue to increase production even with prices at lower levels.