US independents step up hedges to protect cash flow

US upstream independents have increased their hedging activity for the remainder of this year and 2018 in an attempt to protect cash flow against possible crude market volatility.

Many producers took advantage of stable prices in the third quarter — with benchmark WTI at around $50/bl — to safeguard their future output. And they continue to do so. But the reasons behind the move are manifold.

Pioneer Natural Resources, which is focused on Texas' Permian shale basin, hedged a further 59,000 b/d of oil and 83mn ft³/d (857mn m³/yr) of natural gas in July-September. This means that it now has "derivatives that cover more than 80pc of our 2018 oil production forecast, and over 35pc of our gas", chief executive Tim Dove said. The firm generated $29mn from its hedging program in the third quarter. It had hedged half of its expected 2018 oil output by the end of June. "This puts us in a very good position, protected against what could be possible downturns in commodity prices," Dove said.

Hess has similarly "built a strong hedged position in a period of oil price uncertainty", chief executive John Hess said. The company increased its Nymex WTI cover by 50,000 b/d in July-September to 110,000 b/d for the rest of this year, effectively shielding its total US crude production. The hedges have an average ceiling price of $68/bl, and a floor of $50/bl.

Whiting Petroleum, the main producer in North Dakota's Bakken formation, aims to raise its cover for next year to more than 60pc of its projected output. It finalized hedges for 52pc of its 2018 production in the third quarter. The firm will consider hiking the share to at least 60pc if oil prices remain higher, chief financial officer Michael Stevens said. Whiting has protected 62pc of its expected output for the remainder of this year.

But other independents are taking a more cautious approach to hedging. Marathon Oil hopes to strike a balance between underwriting a "certain element of our capital program, while ensuring that we protect some upside for our shareholders", chief executive Lee Tillman said. "We are very much a defensive hedger." The company had cover for 70,000 b/d of its 2017 production at a mean price of around $53.80/bl as of 30 September. Marathon's hedges for next year amount to 68,500 b/d, at $50.95/bl on average.

But Tillman also highlights the firm's output profile, which provides a natural hedge, because of its exposure to different markets and product mixes. Marathon's Bakken crude is changing hands "more or less around WTI", while its production from Texas' Eagle Ford basin is linked primarily to US light sweet LLS, he said. "We have a bit of an intrinsic commodity risk management element embedded in our portfolio."

Apache raised its 2018 coverage by 55,000 b/d in July-September, to guarantee that it can fund the continuing development of new acreage in Texas' Alpine High region. "Our hedged position provides cash flow support to ensure the deployment of high-priority investment, without putting our balance sheet at risk," chief financial officer Stephen Riney said. "We do not use hedges to speculate on pricing... but we generally like to have commodity price exposure," he said. "This is the business we are in."

Anadarko Petroleum prefers to keep its hedged cover at less than 50pc of its overall output, for oil and gas. "Even if we find ourselves willing to put some sort of price floor under oil, we often still do not exceed the 50pc," chief executive Al Walker said.