North American E&P companies hedged more for 2018

North American exploration and production (E&P) companies were more hedged than usual in 2018 to support free cash flow, according to a new research released Tuesday by IHS Markit, a global marketing information company.

According to the IHS Markit Comparative Peer Group Analysis of North American E&Ps, the group of 43 studied companies had hedged 25 percent of 2018 oil production, or 1.37 million barrels per day, at the price of 53.40 U.S. dollars per barrel at the end of the third quarter 2017.

The group had also hedged 36 percent of gas production, or 12.37 billion cubic feet per day, at 3.13 dollars per million cubic feet (Mcf).

This is an increase from 12 percent of oil and 31 percent of gas production hedged for 2018 at the end of the second quarter 2017, as companies took advantage of the initial oil-price rally to the around 50-dollar per barrel range.

"The North American E&P peer group is more hedged for 2018 than for comparable periods at this time in previous years, which suggests a shift in strategy," said Paul O'Donnell, CFA, principal energy analyst at IHS Markit and author of the hedging analysis.

"Companies are seeking more predictable cash flows because of greater investor demands to improve corporate returns and keep capital spending within cash flows," he added.

He explained that "the higher level of hedging is less about supporting aggressive production growth and more about increasing investor confidence that these companies are serious about becoming more financially disciplined."

The IHS Markit report said the small- and mid-size U.S. E&P subgroups had hedged 49 percent of total 2018 production at the end of the third quarter 2017, compared with 18 percent for the large North American E&P subgroup.
"The current oil price rally to the mid-60 dollars per barrel range is an opportunity for companies to build up larger hedging positions at prices that can generate positive returns," O'Donnell said.

He stressed that the E&P companies are now focusing on capital discipline and keeping capital expenditures within cash flows to satisfy the demands of investors who focus on returns, rather than chasing volume growth.