Companies hedge their production to provide a level of protection against oil and gas price fluctuations, and during the period of volatile prices throughout most of 2015 and 2016, North American operators benefitted from having large hedge books, O’Donnell said.
“In 2017, hedging is still important for these E&Ps, especially the more debt-laden companies, which are less likely to withstand sustained low prices or significant price fluctuations,” O’Donnell said. “The oil-weighted peer group increased its 2017 oil hedging from 22% to 34% since the time of our previous hedging study, based off of third-quarter 2016 data.”
If prices were to drop to $35/bbl, Permian operators with the best downside protection include Concho Resources Inc., Parsley Energy Inc., and Laredo Petroleum Inc., IHS Markit indicated.
For 2018, the Permian operators have already hedged 25% of oil production at $51/bbl and 9% of gas at $3/Mcf, while the non-Permian operators are largely unhedged for oil but have 9% of their gas production hedged. “At present, it would be a challenge for the Permian E&Ps to replicate their 2017 hedge positions in 2018 given the weakness in oil prices and the relatively flat futures curve,” O’Donnell said.