Energy Prospectus

Opening Prices:
> WTI is up $1.24 to $71.70/Bbl, and Brent is up $1.20 to $74.80/Bbl.
> Natural gas is up 18.7c to $5.447/MMBtu.

AEGIS Notes
Oil

WTI advanced for a fourth day as a U.S. industry report showed another decline in crude and product inventories
About 720 MBbl/d or 39.6% of Gulf of Mexico output remains shut in following Ida (BSEE)
Iran’s top negotiator has been replaced by a hard-line critic of the 2015 nuclear deal

Ida inflicted disruptions were reflected in the American Petroleum Institute (API) data released Sept. 14
> The API showed a 5.44 MMBbl draw in U.S. crude inventories for the week ended Sept. 10
> Gasoline inventories fell 2.76 MMBbl, and distillate stocks fell 2.89 MMBbl
> U.S. government data (EIA) is due later this morning

Iran removed its foreign negotiator just as world powers pressed Tehran and Washington to quickly revive the ailing accord after talks stalled (Bloomberg)
> Ali Bagheri Kani will take over as deputy foreign minister for political affairs effective immediately
> The new deputy, Abbas Araghchi, has been a critic of the 2015 JCPOA
> AEGIS notes that Iran has had 1.5-1.8 MMBbl/d on the sidelines due to sanctions

Natural Gas

Prompt-month natural gas prices continue their meteoric rise as prices are up another $0.16/MMBtu this morning and up $0.47/MMBtu on the week
The Cal 22 strip now stands at $4.27/MMBtu, while this winter and next summer push $5.47/MMBtu and $3.86/MMBtu respectively

Natural Gas Prices should remain supported due to wide LNG export arbs, low coal stocks and production, longer-than-expected shut in Gulf of Mexico production, and a potential lack of selling pressure for this winter
> TTF prices, the European natural gas benchmark, are above $22.00/MMBtu for the month of October
> Concerns cited include a loss of wind power in the North Sea, Russia’s inability to supply the region, and potential disruptions to U.S. LNG exports following the most recent storm
> Given the spread between Henry Hub and foreign natural gas benchmarks, there should be ample support for prices heading into this winter

Read the profile we sent out this morning on Magnolia Oil & Gas (MGY). NONE OF THEIR PRODUCTION IS HEDGED.

I am curious historically have most oil and gas producers always hedged much of their future production or is this more and artifact of the volatility over the past decade and a half ?

They cant stand waiting to see what they will get so they lock it in.
Some of these guy locked in 2.50. Can you imagine what the profits would be at 5.65??
So they make 50 cents the counter party makes 3.15

Some have to. I'm always baffled why these experts chicken out. We been bullish on energy for last year. They should be smarter than us

I prefer no hedges, if prices are bad, then they can stop drilling.

CRK uses swapoptions. On a conf call they said they like them as they dont have to put up any cash

they write an option giving the buyer time to exercise and it becomes a swap

So, if prices go up, the counter party exercise and crk loses as they get locked in at lower price...
and, if prices go down, the counter party doesnt exercise and crk loses as they dont have the down side hedge. so crk, heads they lose and down market they lose.

i think its a sucker bet.

Yes, historically most of them have hedging programs. Obviously, commodity prices have a big impact on their revenue streams and some are required to hedge because of debt covenants.
I know it is "bad" when commodity prices are rising. But it is "good" when commodity prices are falling, like they did in 2020. Hedging programs saved several of our model portfolio companies from going bankrupt in 2020.

For example: Antero Resources (AR) received cash settlements on the hedges of $325.1 million in 2019 and $794.7 million in 2020. Without that $1.120 Billion of cash flow AR might not have made it to where they are today. During 1H 2021 Antero has only had to pay $65 million to settle their "Bad Hedges". They will pay out quite a bit more in 2H 2021, but they are still benefiting from higher natural gas prices and they are benefiting a lot more from higher NGL prices.

NO MATTER HOW MUCH UPSTREAM COMPANIES HAVE HEDGED, THEY STILL BENEFIT FROM HIGHER COMMODITY PRICES. Why? because (a) 100% of their production is sold at market prices and some can be sold at above NYMEX strip prices, (b) they all have some unhedged production and (c) their year-end reserve reports will get a big boost from higher oil, gas and NGL prices. Year-end reserve reports are used to support their revolving credit facilities that are EXTREMELY IMPORTANT in this business.

Well said Dan. It's easy to armchair quarterback these companies' hedge programs, but a certain amount of hedging is necessary insurance for them (how much is debatable).

One thing I can't wrap my head around is that the majors (XOM, CVX) have no real forward production hedging in place, so one would think their daily volatility would be up there with the independents. Their investor relations pitch tends to emphasize their lack of hedging as a differentiator, yet the daily stock price moves are always relatively muted. I don't know what I'm missing in that regard.

I think the majors aren't getting much "love" because their downstream business (refining and marketing) hasn't been doing well. They seem to be more of a dividend play than a growth investment these days.