U.S. oil CEO Hamm goes out on a limb, scraps hedges

WILLISTON N.D. (Reuters) - Harold Hamm, the chief executive of North Dakota oil producer Continental Resources Inc CLR.N, has stunned a bearish crude market by scrapping all of the company's hedges - a bold bet that prices will recover soon after sliding some 25 percent.

The Continental Resources office building is seen in downtown Oklahoma City, Oklahoma September 22, 2014. REUTERS/Steve Sisney

In so doing, Hamm, who last month called OPEC a “toothless tiger”, appears to be bracing for a price war with the world’s biggest exporter, Saudi Arabia. The OPEC-leader and other key members of the oil exporter group have so far shown no real sign of moving to cut production to lift prices.

Conventional wisdom among oil analysts is that Saudi Arabia, frustrated by a global supply glut caused by soaring output in the United States, is prepared to let prices fall to squeeze U.S. shale oil producers out of the market.

“We have elected to monetize nearly all of our outstanding oil hedges, allowing us to fully participate in what we anticipate will be an oil price recovery,” Hamm said in a statement on Wednesday when the company posted third-quarter results. Continental will hold a conference call on its quarterly earnings with analysts on Thursday.

The move to sell all crude oil hedge positions from October through 2016 netted the oil company a $433 million one-time gain during the most recent quarter.

“We view the recent downdraft in oil prices as unsustainable given the lack of fundamental change in supply and demand,” Hamm said.

Most energy experts said that when prices began falling in June companies should have been carrying more hedging contracts that lock in high prices and protect them from low ones.

“It’s pretty unusual for a company to monetize all of its hedges. The fact that they’re going basically unhedged on oil suggests that they’re going to take on a bit more risk,” said Leo Mariani, an analyst at RBC Capital Markets.

Since they traded at more than $115 a barrel in mid-June, benchmark Brent crude futures have plunged to levels not seen since October 2010, closing near $83 a barrel on Wednesday.

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That rout has punished drillers like Continental, whose shares are down by more than 30 percent over the same period. Many analysts have forecast even lower crude prices.

Hedging offers commodity producers protection from sharp price drops, though it can also limit profits if prices soar. By exiting hedging, Hamm is effectively betting that the steep drop in oil prices is a short-term fluke bound to reverse course.

To be sure, going "naked" without hedges is not unprecedented. Majors such as Chevron Corp CVX.N and Exxon Mobil Corp XOM.N do little hedging on their own production.


Yet in a bit of a strategic hedge, Hamm slashed Continental’s 2015 capital spending budget by $600 million, saying he would not put more drilling rigs in the field while prices are low. Given that, Continental doesn’t expect its production to jump as much as previously forecast next year.

The company now expects a 2015 capital budget of $4.6 billion, down from a previous estimate of $5.2 billion.

Continental, a top producer in North Dakota’s Bakken field, trimmed its output growth estimate for next year, now expecting a 23-29 percent jump from 2014 levels. Hamm had previously forecast a 26-32 percent jump for next year.

It posted third-quarter net income of $533.5 million, or $1.44 per share, compared with $167.5 million, or 45 cents per share, in the year-ago period.

Hamm, who founded the Oklahoma City-based company in 1967, is in the midst of a bitter divorce battle with his wife Sue Ann.

Since Hamm owns about 68 percent of the company, the divorce settlement holds vast implications. During much of August and September, the CEO spent most days in court to attend his divorce trial, which may result in one of the largest divorce judgments in U.S. history.

Philip K. Verleger, president of consultancy PKVerleger LLC and a one-time adviser to President Jimmy Carter, said Continental’s decision on hedging may concern investors.

“My expectation is that Continental’s investors will rue this decision because it changes the firm’s business,” he said. “Hedging provides an assured cash flow. By dropping the hedges the firm is gambling that prices go up. If they go down Continental will go bust.”

Other analysts, however, said the company has a strong balance sheet and can weather the downdraft.

Reporting by Ernest Scheyder in Williston, and Jonathan Leff and Jessica Resnick-Ault in New York; Writing by Terry Wade; Editing by Tom Hogue