Clearly the oil segment within energy is in trouble. The expiring May futures contract fell to an unprecedented level of deeply negative prices, something that should be physically impossible, and the June contract has fallen under $15 per barrel of West Texas Intermediate crude. In this climate, no oil company looks viable, and oil and gas investors may find no stocks to buy in the oil patch.
It may be a hard sell to claim that the oil sector is full of cheap stocks that have to be owned blindly just because they are down so much from their highs. After all, weak oil prices are largely due to absolute demand destruction in the COVID-19 recession, magnified by the Saudi-Russia price and share war that they foolishly kicked off. It turns out that some of the independent oil and gas exploration and production players have hedged their oil production at much higher prices. Some companies are even hedged out through 2021.
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24/7 Wall St. wanted to look for independent oil and gas players that are hedged on their oil production at much higher prices for 2020 and some even out to 2021. Generally speaking, these hedged companies are looking at $30 or higher per barrel (WTI) for the rest of 2020 and some into 2021. These seven names stood out in our first review, in which updates have been offered over the past 30 days or so.
This year is proving to be brutal for the oil and gas sector. A fresh screen of about 125 independent oil and gas players showed a significant number (more than 40) had stocks trading under $1 and a large majority had share prices under $5. Some of these stocks have fallen 75% or more from their 52-week highs.
If a company is hedged, and as long as its counterparties are operating and all markets are functioning normally, their revenues should be able to remain higher than normal even with the spot price so much lower. That said, it’s obvious that there has been discord in the markets and that some of the exchange-traded products are not functioning properly. When companies announce updates to their liquidity and hedging strategies, it is not uncommon for them to use certain price assumptions, and it is also common for them to remove any prior guidance, if they are updating their guidance.
24/7 Wall St. used some data from Criterion Research and Standard & Poor’s, as well as from screens in press releases and SEC filings covering oil-hedging activities within the past 30 days. As a reminder, companies can change their hedges, and hedges should always be considered as snapshots in time and based on the then-current pricing conditions if they are disclosed by each company. There are no assurances that hedged companies will post profits, and many of these companies have seen their stock prices remain weak. Many oil and gas dividends have been considered at-risk as others have lowered their payouts.
Cimarex Energy Co. (NYSE: XEC) updated its outlook for a 55% to 60% reduction in capital investment program this year from its original guidance of $1.25 billion to $1.35 billion. The company also announced that it has deferred completion activities and that it plans to drop all but one drilling rig in early May. Cimarex also announced that is has curtailed approximately 30% of its volumes for May, while maintaining that it has the ability to adjust its investment in the second half of 2020 as (or if) conditions change.
The firm Stifel recently had a contrarian Buy rating on Cimarex and others. While it has gas hedges as well, the weighted average production floors and barrels per day were as follows:
- Q2-20 34,341 bbl/d at $$48.29;
- Q3-20 41,000 bbl/d at $40.91;
- Q4-20 41,000 bbl/d at $49.84;
- Q1-21 33,000 bbl/d at $38.71;
- Q2-21 23,000 bbl/d at $34.00;
- Q3-21 14,000 bbl/d at $29.71;
- and Q4-21 14,000 bbl/d at $29.71.
Devon Energy Corp. (NYSE: DVN) issued an update to its 2020 capital expenditure outlook and hedge positions on March 30. It was reducing capital expenditures by an additional $300 million for the full-year to approximately $1 billion, for a total reduction of approximately 45% from its original 2020 capital budget. As far as hedging, it said:
As previously disclosed on March 19, 2020, the company has approximately 80 percent of its estimated oil production in 2020 protected at an average floor price of nearly $45 WTI. Additionally, Devon has secured hedges on approximately 40 percent of its estimated natural gas production in 2020 at an average Henry Hub protected floor price of $2.35 per million cubic feet.
Diamondback Energy Inc. (NASDAQ: FANG) announced lower production and lower capital spending on March 31. The company had a total of 178,800 bbl/day protected in 2020 and said that 98% of those hedges had unlimited downside protection as a swap, put or collar. It also has an average of 83,500 bbl/day of hedge protection in 2021 via collars and swaps. After looking at the tables of collars and on its larger portions of production, the floors for the rest of 2020 were $35.56 and $37.74. That said, there were 10 different items covering swaps, puts, costless collars, costless put spreads and additional swaps.
The release said:
The Company has restructured a significant number of its 2020 contracts, increased hedge protection to cover almost all of its expected 2020 production, and built a position to protect 2021 cash flow. The Company’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate pricing and Crude Oil Brent and with natural gas derivative settlements based on the New York Mercantile Exchange Henry Hub pricing.
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Laredo Petroleum Inc. (NYSE: LPI) issued its hedging and budget update on March 3 to prioritize its free cash flow and balance sheet strength. The company lowered its 2020 capital budget by 36%, down to $290 million, from its prior $450 million. Laredo noted that it expected to generate approximately $90 million in free cash flow in 2020 (assuming $25 WTI for balance of year) along with an “extremely strong hedge position” as 100% of anticipated oil production was hedged: 7.2 million barrels swapped at $59.50 WTI and 2.4 million barrels swapped at $63.07 Brent.
Laredo’s announcement in March showed that February’s annual guidance should no longer be relied upon. It further planned to reduce its operated rig count from four rigs to one by June and expects to run one rig for the rest of 2020. The company expects oil production for 2020 to decline approximately 8% versus 2019 and for total production to remain approximately flat.
Marathon Oil Corp. (NYSE: MRO) announced its updated 2020 capital spending budget and hedging outlook on April 8. The company’s revised capital budget of $1.3 billion (or less) will make for a cumulative budget reduction of $1.1 billion from its initial 2020 capital spending guidance, or approximately 50% below actual capital spending in 2019. Marathon plans to suspend further drilling activity in the Northern Delaware while it will continue to optimize development plans in the Bakken and Eagle Ford.
Marathon Oil also has offered a hedging update with new and restructured hedges to protect near-term crude oil downside and basis differentials, as follows. While three-way collars on NYMEX WTI were not in place for the second quarter, they were for 80,000 bbl/day with a $55 floor for the third and fourth quarters but with sold puts at $48.00. Marathon’s NYMEX WTI two-way collars covered 40,000 bbl/day with a $32.89 floor and its fixed-price WTI swaps in Q2-2020 covered 60,000 bbl/day with a weighted average price of $30.73.
Matador Resources Co. (NYSE: MTDR) announced on April 13 its 2020 operational plan and hedging program as it updated its first six Rodney Robinson wells in the Antelope Ridge asset. Its Rodney Robinson wells initial potential test results from all three formations are expected to contribute 8% to 10% of Matador’s total production for the remainder of 2020. The company noted that it has restructured 2020 oil hedges now to cover 75% to 80% of its anticipated oil production at a price of $35 per barrel or higher for remainder of 2020.
The release said:
Recent actions taken by Matador should save or cause the Company to receive a sum approaching $340 million in 2020, as compared to its original 2020 estimates, including reductions of $250 million in capital expenditures for drilling, completing and equipping wells (“D/C/E capital expenditures”) and $40 million in operating expenses, in particular lease operating and general and administrative expenses.
Noble Energy Inc. (NASDAQ: NBL) announced back on April 15 its updated outlook with capital spending. The company maintained that it benefits from “a high-quality, low-decline portfolio, strong capital discipline, and an ability to flex spending as appropriate.” That included lower planned capital expenditures by an additional $350 million for 2020 to now range from $800 million to $900 million, for a total cut from original expectations of 50% or so. Noble also identified an additional $125 million in cost savings from lease operating, gathering and transportation, production taxes, G&A and retiring assets.
Noble noted that cash-settled certain 2020 crude oil hedges that had reached maximum value had generated an additional $145 million in realized gains in the first quarter, while it had also added new downside oil hedge protection for the rest of 2020. It drew $1 billion of its total unsecured $4 billion revolving credit facility as of the end of the first quarter and lowered its dividend. Noble addressed its hedges as follows:
First quarter realized hedge gains totaled $207 million, including $145 million from the early settlement of certain oil hedges covering the remainder of 2020. Monetization of the early settlements was executed in March and consisted of 30 MBbl/d of three-way hedges, along with 24 MBbl/d of swaps and put options, the combination of which reached maximum value when WTI prices were lower than $48 per barrel. … For the second quarter of 2020, the Company has approximately 120 MBbl/d of swaps at an average price of approximately $35.85 per barrel WTI. Second half swaps include 38 MBbl/d in the third quarter at an average price of $36.80 per barrel WTI and 15 MBbl/d for the fourth quarter at an average price of approximately $51.91 per barrel WTI. For the second half of the year, the Company also has 53 MBbl/d of three-way hedges with floor protection of $25 per barrel WTI and a ceiling of $37.25 per barrel.
Again, there is a lot that goes into hedges. Many players in the oil patch have continued to see their shares slide regardless of whether they were hedged.
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