A new study shows that North American energy firms will face more challenges as oil prices continue to slump in 2016.
As oil prices continue to decline, North American exploration and production companies (E&Ps) have hedged just 15 percent of their total production volumes for 2016, including 14 percent of oil and 18 percent of natural gas, leaving the companies largely exposed to current depressed market prices, according to new analysis from market information firm IHS.
According to the IHS Energy Comparative Peer Group Analysis of North American E&Ps, production hedging for the group of 51 companies studied will fall even more significantly in 2017, when just 4 percent of total production will be hedged, including only 2 percent of oil and 7 percent of gas, IHS said.
“Companies hedge their production to provide a level of protection against oil and gas price fluctuations, and in 2016 and 2017, we see a significant decline in hedging protections, which means more companies are exposed to the current depressed prices and market conditions,” said Paul O’Donnell, principal analyst at IHS Energy and author of the hedging analysis. “For most companies in the sector, 2016 is going to be another very tough year, as plunging revenues lead to balance sheet deterioration, and financial pressures mount.”
The small U.S. E&Ps have the highest level of hedging protections, the IHS report said, with 47 percent of their oil production hedged at $74.31 per barrel, and 46 percent of gas production hedged at $3.43 per thousand cubic feet (Mcf), compared with 77 percent of oil at $83.15 per barrel, and 58 percent of gas at $3.67 per Mcf in the fourth quarter 2015. Within this group, IHS said, Comstock Resources, Approach Resources and Stone Energy are among the most at risk of financial stress owing to high debt and little hedging.
The midsize U.S. E&Ps have hedged 43 percent of oil production at $60.54 per barrel and 26 percent of gas production at $3.34 per Mcf. High-debt companies with little hedging include Ultra Petroleum and SandRidge Energy. (Reuters reported January 25 that SandRidge Energy is exploring debt restructuring options, according to people familiar with the matter, as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices.)
The large U.S. E&Ps have hedged just 6 percent of oil production at $53.85 per barrel and 16 percent of gas at $3.58 per Mcf, making them the most exposed of the U.S. peer groups, IHS said. The majority of companies in this group are unhedged in 2016 and 2017, although their balance sheet strength is superior to that of their smaller counterparts, offering a bigger financial cushion.
The Canadian E&Ps have hedged just 9 percent of oil at $78.54 CAD per barrel and $3.87 CAD per Mcf, IHS said. Penn West and Canadian Natural Resources are the most exposed higher-debt companies.