NEW YORK (Reuters) - With the benefit of hindsight, last quarter may have been the best chance for cash-strapped U.S. shale oil producers to ensure they would get at least $60 a barrel for the next year or two. Barely a third did so.
According to a Reuters analysis of hedging disclosures by the 30 largest such firms, more than half of them did not expand their hedges during the three months ended June or had no hedges at all, exposing them to a plunge that wiped more than $20 off the price of oil in the following months.
In total, 12 companies increased their outstanding oil options, swaps or other derivative hedging positions by 36 million barrels at the end of the second quarter compared with the end of the first quarter, according to the data.
Another 14 companies ended the quarter with hedging positions reduced by a total 37 million barrels, mainly as a result of expiring past hedges, the data show. The remaining four companies did not hedge oil production at all.
As a whole, the group remains more vulnerable to tumbling spot market prices than a year ago, with a third fewer barrels hedged, the data show.
“The general feeling among producers is that if you aren’t hedged today... (you are) not going to start tomorrow and lock in lower levels,” said Mike Corley, president of energy trading and risk consultancy Mercatus Energy, which advises energy producers, consumers and refiners.
Producers buy a variety of financial options to secure a minimum price for crude and safeguard future production. Typically, market rallies, such as one in April, allow producers to lock in prices at a lower cost.
Market reversal earlier this quarter, with oil prices crashing to 6-1/2-year lows below $40 a barrel, has made hedging positions increasingly critical for understanding which shale firms are most affected by the worst slump in a generation.
Several firms that tend to run large hedging positions increased them during the second quarter, including Pioneer Natural Resources and Concho Resources.
However, some other usually significant users refrained from building a larger buffer. Noble Energy, Devon Energy, EOG Resources and Newfield Resources are among those which let the number of insured barrels fall the most.
For oil traders, the derivatives disclosures serve as an leading indicator of future shale supplies. Many analysts expect U.S. oil drilling to decline further as old hedge positions begin to wind down, leaving more small producers exposed to market prices at below break-even levels.
In total, the data show the 30 biggest publicly listed shale-focused producers by output held hedged positions equivalent to about 366 million barrels of oil as of June 30, compared with 367 million at the end of March. A year ago, they had 562 million barrels, according to the data.
While markets have been aware of the industry’s reduced hedging for months, the new data show which companies chose to cover more of their production when the 2016 U.S. oil swap was trading at around $64 a barrel. By last week, it had fallen to $43 and even though it came back to around $50 on Wednesday, many analysts expect prices to slide again.
It is not clear why some producers chose to hedge aggressively during the quarter, while others passed up on the opportunity. The producers contacted by Reuters declined to elaborate on their filings or comments made during last month’s earnings calls.
Marathon, the sixth-largest producer in the group analyzed, did not have any hedges in 2014, but added some in the first quarter and extended protection into 2016 in the second.
“We really just were able to begin to establish a position in 2016 before the market fell on us, but it’s definitely going to be a tool we’re going to continue to use,” chief financial officer John R. Sult told analysts last month.
In contrast, EOG Resources, which typically carries a large volume of swaps on its books, has let most of them expire and kept only 10,000 barrels per day for the third and fourth quarter, its report shows.
Devon, which picked up small volumes in the second quarter, said it was confident it would continue increasing oil production despite hedges rolling off, its chief executive said in an earnings call in August.
U.S. shale producers are more leveraged than most big oil majors and operate in basins with relatively higher costs and have used hedging to a greater degree than most of their rivals around the world.
It will take several more months to find out which companies may have increased their hedges during oil’s renewed slide in the past two months.
Some highly-leveraged drillers may be forced to boost hedging to safeguard cash flow ahead of October, when many will be locked in critical bi-annual credit negotiations with lenders, dealers say.
That could further weigh on oil prices by allowing stretched producers to pump oil for longer and thus maintaining ample supply. Producers selling forward production may also depress newly resurgent prices.
“When a rebound does come for oil, it’ll face additional headwinds on its way up from producer selling,” said Michael Cohen, head of energy commodities research at Barclays.
Reporting By Catherine Ngai; Editing by Jonathan Leff and Tomasz Janowski