CFO Says
Occidental Scrapping Oil Hedging Next Year on Rally, CFO Says (Bloomberg)
Occidental Petroleum Corp., one of the Permian Basin’s biggest producers, will all but end hedging next year due to the run-up in oil and gas prices, Chief Financial Officer Rob Peterson said on a call with analysts.
“Our current oil and gas hedges will expire by the end of this year, and we have not added any new hedges for future periods,” he said.
Rival Pioneer Natural Resources Co. also pledged to end hedging earlier this week. U.S. shale producers have typically been highly active in hedging production to cover capital spending and debt repayments. But as both outlays have dropped since Covid-19 and cash flows have increased due to surging oil prices, there’s less need to use financial instruments for downside protection.
Hedge low , don’t hedge high
Re: Hedge low , don’t hedge high
The problem is that backwardation of the NYMEX strip makes it difficult to add new hedges at oil or gas prices near current prices. The backwardation of the WTI strip has NEVER been this steep.
I had lunch today with Matt Marshall, VP from AEGIS and ten other industry experts. Matt opened the discussion by saying that the NYMEX strip doesn't match with supply / demand fundamentals. For oil, the refiners around the world are "short oil" so they have to bid up the front months of the strip to lock in adequate supply. The out months of the strip are low because the speculative "paper traders" lack the confidence and/or money to take long positions. This is BULLISH for the oil price because US and oil inventories are so low. The front month peak will just keep rolling forward, so it is not wise to hedge now.
Other points discussed at lunch:
> OPEC+ may not have as much spare capacity as they claim. Several OPEC members can not meet their quotas now.
> Demand for oil exceeds supply TODAY by AT LEAST a million barrels per day.
> US and offshore oil production will not snap back no matter how high oil prices go because of the damage done to the oilfield services sector.
> Lack of capital is no longer the problem it was six months ago. Most of the public upstream companies are now FCF positive and committed to live within cash flow. Group estimate is that most public upstream companies will keep capex under 30% of FCF and use the other 70% for debt repayment, dividend increases and stock repurchase plans. They all think their stock is under-valued by the market.
> Lots of "Bad Hedges" expire in December, so FCF should surge in 2022.
> An economist pointed out that the oil price is now back to the long-term relationship that its had with gold prices. The historic relationship is 18 barrels of oil = 1 ounce of gold +/- 2 bbls. Gold closed at $1,824/ounce today; do the math.
> The paradigm that will send oil over $100/bbl is that global oil supply will soon peak, but demand likely to go a lot higher.
I had lunch today with Matt Marshall, VP from AEGIS and ten other industry experts. Matt opened the discussion by saying that the NYMEX strip doesn't match with supply / demand fundamentals. For oil, the refiners around the world are "short oil" so they have to bid up the front months of the strip to lock in adequate supply. The out months of the strip are low because the speculative "paper traders" lack the confidence and/or money to take long positions. This is BULLISH for the oil price because US and oil inventories are so low. The front month peak will just keep rolling forward, so it is not wise to hedge now.
Other points discussed at lunch:
> OPEC+ may not have as much spare capacity as they claim. Several OPEC members can not meet their quotas now.
> Demand for oil exceeds supply TODAY by AT LEAST a million barrels per day.
> US and offshore oil production will not snap back no matter how high oil prices go because of the damage done to the oilfield services sector.
> Lack of capital is no longer the problem it was six months ago. Most of the public upstream companies are now FCF positive and committed to live within cash flow. Group estimate is that most public upstream companies will keep capex under 30% of FCF and use the other 70% for debt repayment, dividend increases and stock repurchase plans. They all think their stock is under-valued by the market.
> Lots of "Bad Hedges" expire in December, so FCF should surge in 2022.
> An economist pointed out that the oil price is now back to the long-term relationship that its had with gold prices. The historic relationship is 18 barrels of oil = 1 ounce of gold +/- 2 bbls. Gold closed at $1,824/ounce today; do the math.
> The paradigm that will send oil over $100/bbl is that global oil supply will soon peak, but demand likely to go a lot higher.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Hedge low , don’t hedge high
Good points!
I think there is a 50/50 chance Team Biden is going to do something stupid regarding energy.
1. my guess would include shutting down a few pipelines Michigan and the pipe that goes into st louis
2.Prohibit LNG and or oil exports
No matter how stupid these moves are, I have no confidence of them making sound choices.
I think there is a 50/50 chance Team Biden is going to do something stupid regarding energy.
1. my guess would include shutting down a few pipelines Michigan and the pipe that goes into st louis
2.Prohibit LNG and or oil exports
No matter how stupid these moves are, I have no confidence of them making sound choices.
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SergioSays
- Posts: 99
- Joined: Mon Jul 12, 2021 8:59 am
Re: Hedge low , don’t hedge high
great points y'all. I've been mystified by this forward curve as well, but the good news is it means our co's are severely undervalued. Reality has to hit sooner or later on the back end.
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CreativeEquity
- Posts: 107
- Joined: Sun Sep 05, 2021 5:06 pm
Re: Hedge low , don’t hedge high
As the producers reduce forward hedging we will see less backwardation. It is slowly starting to happen but will take time. Many CEO's are still more worried about their job security than shareholder return imo.