Earnings Impact: Oil Companies Hedging Strategies

crude oil producers hedging

Earnings Impact: Oil Companies

In light of the recent plummet in oil prices the impact on corporate earnings is under review.   One of the many moving parts is how a company hedges their market risk.  Focusing on just the producers of crude oil (Exploration and Production Cos.) this article details one of the hedging strategies favored by oil production cos. using options.

Exploration & Production Companies – Hedging Oil Price Risk

There are a few strategies they favor but one should be highlighted given the recent price rout in oil.   For those of you unfamiliar with option strategies and woukd prefer to read something directly related to commodities take a look at Mercatus Energy Advisors article on the Three Way Collar.  

 Bloomberg highlights  the Mercatus piece and points out 6 companies currently using the three-way collar strategy.  So let’s take a look.

Oil Companies Hedging Strategies – Examples

Pioneer Natural Resources (PXD)  covered 85% of its 2015 production using the 3 leg collar.  The purpose to hedge their price riskspend little to no premium while using strike prices (price levels) at risk points the company can live with.  The sale of the put (used by producers of commodities) is done to further defray expenses and has a strike price very close to where the company views the absolute bottom in the commodity.

Producers Three Way Collar: Sell a CALL and Buy a PUT &  SELL a lower strike put (called the sub-floor).  In the case of PXD, they capped price on production at $99.36 and floored at $87.08 with a subfloor at $73.54.

oil producers hedge


Other Producers who hedge using the three-way collar

Noble Energy Inc.  (NBL)

Anadarko Energy   (APC)

Bonanza Creek (BCEI)

Callon Petroleum (CPE)

Carrizo Oil & Gas

Parsley Energy


Caution for Stock Buyers Evaluating Time to Purchase Oil Stocks

There are many people enquiring about the time to purchase “:oil” but what they mean is when should they buy oil stocks.  corporations engagedin this business are varied in the way they make their money and how they hedge themselves.  Presuming you will be focusing on Producers, check how much of their 2015 production they’ve hedged already and calculcate their effective sale price on oil.

Note if the corporation has any other business interests: Natural Gas subs, LNG subs,  Minority holdings to name a few.

Also make note of any other natural hedges the corporation has either within their value chain or external natural hedges, such as sale contracts pre-written with end users of crude oil (refineries).

Bear in mind there are a lot of moving parts in the oil business.  This blog is meant to show what corporations have on their books today as a hedge for crude oil only.  The list contains mostly independents.   Integrated oil companies are a good example of a corporation who very likely has natural hedges (internal or external).  However, the in dependent oil prociers mentioned here also have natural hedges.

Why is the three-way collar such a popular strategy with producers?

It’s popular because the strikes can be structured so that the corporation doesn’t have to pay any premium.   Corporations, unlike asset managers and hedge funds have a hard time committing cash to purchase options.

The collar strategy is a popular strategy for corporations for every risk on their books: Interest Rates, Currencies, etc.  The corporation is comfortable saying “I’ll trade off my profits and in return hav a hedged business and needn’t pay anything for the options”.   However the ore common derivation of this trade is the two-sided collar (sellcall, buy put or vice versa).  The three way tends to be more popular with commodities.




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