Hedging Helps Worst Performing Oil Companies


Some of the worst-performing oil companies in North America are getting more for their crude even after the drop in oil prices.  Their proceeds are better than Exxon Mobil Corporation and other giants.  But their debt burden makes them vulnerable in the future.

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According to data compiled by Bloomberg, the Goodrich Petroleum Corporation sold its output for $86.49 a barrel in the second quarter.  Halcon Resources Corporation sold it for $81.18 and Chevron Corporation received an average $54.26 for its production.  All these worst performing smaller players made better than Exxon Mobil, which was able to sell its output for $56.90.

The reason behind this differential selling pricing was the lack of cash.  The smaller companies have risky credit, and they buy insurance against an oil crash.  Due to which they can lock the higher prices.  These hedges have helped the smaller players as oil dipped more than 60 percent since June 2014 to a six-year low below $42 a barrel.

Still, this is an alarming situation for the smaller players in the future.  Leo Mariani, an analyst with RBC Capital Markets in Austin, Texas, felt that the more debt you carry, you need to buy more hedges for protecting yourself in a downturn.  That is why big companies don’t have hedges as they don’t have much debt, and they don’t need them.  Hence, Exxon Mobil does not require hedging.  Last month, the company reported $4.3 billion in cash, even though they had a worst quarterly profit since 2009.

Brian Velie, an analyst with Capital One Securities in New Orleans, felt that the well-timed hedges saved the small players this year.  As the oil hedges are going to expire in 2017, the smaller companies like Halcon and Goodrich are going to feel the heat.  

Source: Bloomberg