US E&P companies have so far hedged 41% of their total forecasted 2021 oil output at an average price floor of $42/bbl (NYMEX WTI equivalent), lower than this year’s floor of $56/bbl, according to Rystad Energy. Gas has proven more resilient as more than 45% of the expected production is hedged at a Henry Hub base floor price of $2.58/MMbtu, marginally lower than 2020’s $2.70/MMbtu.
Hedging strategies have helped US upstream operators cushion cash flows amid weak oil prices. From the representative oil-producing peer group analyzed by Rystad Energy, 20 companies communicated hedging volumes for 2021 as of early October. These operators account for 32% of the expected 2020 US shale oil production.
The analysis includes all contracts, with full or partial floor protection: swaps, collars, and three-way collars. Collected contracts reference different price strips – WTI NYMEX, WTI Midland, WTI Houston, and Brent. For its analysis, Rystad converted to a WTI NYMEX equivalent, assuming a spread of $0.30/bbl for WTI Midland, $0.70/bbl for WTI Houston, and $2.50/bbl for Brent versus WTI.
“The share of three-way collars has dropped significantly since the spread of COVID-19, accounting only for 17% of the 2021 settlements compared to 41% in 2020. This change comes as the collapse in the crude market in early 2020 meant that prices broke the subfloor of most of these contracts, generating only around $10 uplift to the pre-hedged realized price,” said Alisa Lukash, senior shale analyst at Rystad Energy.
Occidental sold a large volume of call options for 2021 settlement, even though these contracts alone are not considered hedging contracts because they have no floor protection. They provide a price ceiling at around $74/bbl Brent and can potentially be combined with the puts to create a collar or a three-way collar in the future, similar to the operator’s 2020 derivative strategy. That means the share of its 2021 three-way collars might still grow significantly in coming quarters, Rystad analyzed.
Laredo Petroleum, Parsley, Pioneer, and Diamondback have hedged a significant amount of their expected oil production against Brent, Rystad said. It is important to outline that the calculated floor in some cases is also an actual price per barrel in a swaps contract. The distribution of the hedged volumes is quite wide. Only three operators – Marathon Oil, Murphy Oil, and Ovinitiv – have less than 20% of their expected 2021 oil production hedged, analysis showed.
SM Energy, Parsley, and Laredo Petroleum have above 60% of their forecast 2021 output protected, Rystad said, while most others come in between 20% and 60%. Some names, mainly highly leveraged companies, added hedges in early 2020 to cover a large volume of their expected output, taking advantage of a higher strip price.
Laredo Petroleum secured swaps at $49/bbl Brent for 50% of its expected 2021 crude output. In contrast, Pioneer continued with large volumes secured through three-way collars, only adding an extra ceiling for the purpose of capturing premiums for its 2021 settlements (short calls) despite the expected crude price volatility.
While market sentiment for US gas looks brighter in 2021 based on the latest Henry Hub NYMEX futures strip – with average quoted prices breaking $3/MMbtu already for December – most gas producers effectively remain cautiously optimistic. Looking at their hedged positions for 2021, Rystad Energy also analyzed a peer group of 10 dedicated public US shale gas players whose net production represents over a fifth of the total expected US gas volume in 2020.
Generally, the gas peer group is also well hedged, Rystad said, but there is room for additional layering of hedge positions in 2021, especially given that the peer group hedged nearly 70% of its 2020 volumes, the firm continued.
Notable outliers include Antero, which has hedged most of its production already, as it did in 2020, and at a higher floor price, Rystad said. On the other end, Cabot Oil and Gas, which has historically maintained a low hedging profile, currently remains unhedged for 2021. This perhaps also reflects bullish views on gas prices communicated by the management.
