Third-quarter profits to sparkle for shale producers without hedges

A work-over rig performs maintenance on an oil well in the Permian Basin oil production area near Wink, Texas U.S. August 22, 2018. Picture taken August 22, 2018. REUTERS/Nick Oxford/File Photo/File Photo

Oct 26 (Reuters) - With oil and gas prices at multi-year highs, U.S. shale producers are poised to deliver the strongest earnings since the onset of the coronavirus pandemic, so long as they didn't lock in sales tied to much lower prices.

Sky-high oil and gas prices will fill energy companies' bottom line, rewarding investors who hung on through the pandemic. U.S. crude averaged roughly $71 a barrel, almost 80% higher than year-ago levels, and natural gas sold for over $5 per million British Thermal Units (mmBTU), a price not seen since 2014.

The biggest oil and gas producers kick off results this week, with reports from EQT Corp (EQT.N) and Hess Corp (HES.N). Continental Resources (CLR.N), Pioneer Natural Resources (PXD.N) and EOG Resources (EOG.N) will report the week after.

Pioneer's earnings per share could hit $3.94, up from 17 cents last year, and Continental earnings are estimated at $1.20, versus a loss of 16 cents a share the same period last year, according to Refinitiv IBES.

While commodity prices are an earnings elixir, some companies face charges to earnings from wrong-way bets due to hedges, or selling future output at prices below the market average.

EQT Corp, which hedged heavily, is anticipated to report a 5 cents per share loss, from a 15 cents per share loss in the third quarter of 2020. Pioneer Natural Resources on Monday warned it would report hedging losses of $501 million for the quarter, and over $2 billion in losses so far this year. read more

"The only thing that is going to be preventing a blowout quarter is the hedging situation," said Chris Duncan, an equity research analyst at Brandes Investment Partners, adding that some 50% of production volumes were hedged for the quarter.

Energy tech firm Enverus anticipates some $6 billion in aggregate pre-tax losses from third quarter commodity hedges among the 64 North American oil and gas producers it tracks. Those firms lost some $10.5 billion from derivatives in the first half of the year, according to Enverus data.

Enverus anticipates oil and gas producers to report free cash flow of $11.9 billion for the quarter, with loss-making hedge books reducing that value by 32%.

(Click here for an earnings chart.)

Shale producer EOG Resources (EOG.N) recently warned it would report a loss of $494 million on its hedges. EQT Corp earlier this year said it hedged 80% of this year's output at below $3 per million British thermal units, well below market prices. Apache parent APA Corp said it anticipated $37 million in losses.

"Overly hedging as some of these producers have done impairs their ability to be competitive in a rising price environment," said Josh Young, chief investment officer at energy investor Bison Interests.

Continental Resources, which limits its hedging, last quarter increased its dividend and resumed a $1 billion share repurchase program.

A spokesperson declined to comment.

While shareholders may lament missing out higher prices, hedges can help keep companies on secure financial footing, locking in prices to pay for drilling expenses.

"Credit investors we have spoken with lately are concerned that issuers may unwind their hedges," said John Kempf of credit firm Fitch Ratings. "Creditors do not want to assume price risk."

Reporting by Liz Hampton in Denver; Editing by Lincoln Feast.

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