Raymond James Report published Jan 17
Posted: Tue Jan 17, 2023 11:35 am
Today's Energy Industry Brief.
Energy Stat: E&P Hedges Continue to Lose Their Appeal
As we kick off 2023, it is time to once again evaluate E&P hedges. The trend remains the same: hedges continue to shrink across the industry due in large part to pristine balance sheets and more conservative activity plans (relative to pre-COVID). As it stands, hedges are down ~50% year-over-year. If our bullish oil call ($100/bbl FY23) proves accurate, there are going to be a lot of happy management teams (and E&P investors).
The main takeaways when looking at the hedge profile of our E&P coverage:
* 2023 hedges are less than half that of 2022, standing at 18% of total estimated volumes.
* Strip no longer severely backwardated, but bullish commodity backdrop and strong balance sheets (around 1x leverage) seem to be discouraging hedges.
* Zero large caps and only two companies (RRC and BSM) with over 50% hedges, although we do expect NOG and SWN to add hedges and break the 50% mark. Worth noting, NOG is the only company with an oil focus in the group.
* Eight companies in our coverage are going with no oil hedges into the new year. PXD, APA, AR, COP, and OXY carry on as they were, but they are joined by HES, MTDR, and MRO for the new year. It should be noted that we still anticipate Hess to adopt a similar approach to hedging this year as they did last year. Specifically, Hess buys puts (downside protection), but leaves their upside uncapped.
Unlike the past two years, based on the current strip, hedging losses should be minimal and not nearly the headwind they’ve been. The average hedging price has improved substantially and instead of looking at ceilings (i.e. potential losses), we are instead looking at hedging floors (potential gains) thanks to the crash in both crude and gas prices.
● 2023 oil hedges have an ~18% higher floor than the 2022 counterparts.
● 2023 natural gas sees almost the same boost, 20% higher in 2023 compared to 2022.
● There are now multiple operators (BSM, MTDR, VTLE, NOG, CTRA, and DVN) who are in the money on 2023 (albeit barely) hedging contracts.
Energy Stat: E&P Hedges Continue to Lose Their Appeal
As we kick off 2023, it is time to once again evaluate E&P hedges. The trend remains the same: hedges continue to shrink across the industry due in large part to pristine balance sheets and more conservative activity plans (relative to pre-COVID). As it stands, hedges are down ~50% year-over-year. If our bullish oil call ($100/bbl FY23) proves accurate, there are going to be a lot of happy management teams (and E&P investors).
The main takeaways when looking at the hedge profile of our E&P coverage:
* 2023 hedges are less than half that of 2022, standing at 18% of total estimated volumes.
* Strip no longer severely backwardated, but bullish commodity backdrop and strong balance sheets (around 1x leverage) seem to be discouraging hedges.
* Zero large caps and only two companies (RRC and BSM) with over 50% hedges, although we do expect NOG and SWN to add hedges and break the 50% mark. Worth noting, NOG is the only company with an oil focus in the group.
* Eight companies in our coverage are going with no oil hedges into the new year. PXD, APA, AR, COP, and OXY carry on as they were, but they are joined by HES, MTDR, and MRO for the new year. It should be noted that we still anticipate Hess to adopt a similar approach to hedging this year as they did last year. Specifically, Hess buys puts (downside protection), but leaves their upside uncapped.
Unlike the past two years, based on the current strip, hedging losses should be minimal and not nearly the headwind they’ve been. The average hedging price has improved substantially and instead of looking at ceilings (i.e. potential losses), we are instead looking at hedging floors (potential gains) thanks to the crash in both crude and gas prices.
● 2023 oil hedges have an ~18% higher floor than the 2022 counterparts.
● 2023 natural gas sees almost the same boost, 20% higher in 2023 compared to 2022.
● There are now multiple operators (BSM, MTDR, VTLE, NOG, CTRA, and DVN) who are in the money on 2023 (albeit barely) hedging contracts.