North American E&Ps risk financial stress having missed the price hedge window
Many North American exploration and production (E&P) companies – particularly small and mid-size firms — risk financial stress, as just 11% of 2016 production is hedged, according to analysis by IHS.
The “IHS Energy North American E&P Peer Group Analysis: Hedging Protection Set to Plunge in 2016,” assessed the amount of oil and gas hedging protections in place for 48 small, midsize and large North American E&P companies for the second-half of 2015 and full-year 2016.
Overall hedging for second-half 2015 was largely unchanged from previous IHS analysis — the North American E&Ps have 28% of total production hedged for the remainder of the year.
The weighted-average hedged prices the group has in place for 2016 are $69.04 per barrel (Bbl) of oil and $3.83 per thousand cubic feet (Mcf) of gas. The small and mid-sized E&Ps increased 2016 hedging the most during the first-half of 2015, while the large E&Ps remained mostly unhedged.
“The North American E&Ps remain largely exposed to low prices in 2016, with just 11% of their total production hedged for the year, at hedged prices significantly below those locked in for 2015,” said Paul O’Donnell, principal equity analyst at analytics firm IHS Energy and the report’s author.
“For smaller companies, the combination of less hedging and lower oil prices doesn’t paint a pretty picture for 2016,” according to O’Donnell. “Companies that missed the opportunity to lock in relatively higher oil prices during the second quarter of 2015, will face pressure to curtail drilling activity and CAPEX [capital expenditures] in order to avoid further balance sheet deterioration.”
O’Donnell said IHS expects capital spending for the North American E&P group will drop 25% in the second half of 2015, as compared with the year’s first half, from roughly $60 billion, to $45 billion.
Small North American E&Ps have hedged 25% of estimated 2016 total production and continue to have the weakest balance sheets, according IHS. Midsize E&Ps have hedged 26% of estimated 2016 total production.
“The large North American E&Ps have hedged just 6% of 2016 production and will rely more on their stronger balance sheets to weather low prices,” O’Donnell said. “No oil-weighted large E&Ps have any significant hedging in place for 2016.”
The sector is busy cutting costs, and IHS believes companies can now earn a similar rate of return at $60/Bbl that they used to be able to generate at $90/Bbl.
“The rebound in oil prices during the second quarter created a window of opportunity for operators to lock in 2016 oil volumes at stronger prices,” O’Donnell said.
Note: Read all of the Kallanish Commodities Energy News which is published daily online, www.kallanishenergy.com. Kallanish also publishes a daily newsletter, and will be happy to add your name to the distribution list. Simply email .