North American exploration and production (E&P) companies have only hedged about 11% of their natural gas and oil volumes in 2016, leaving many possibly facing financial stress, according to an IHS Inc. performance analysis.
IHS Energy's North American E&P peer group analysis issued on Tuesday reviewed the amount of hedging protections in place for 48 small, midsized and large E&Ps. Researchers reviewed hedging programs for the second half of 2015 and full-year 2016.
Overall hedging for the last half of this year is unchanged from an analysis conducted earlier this year by IHS. Earlier this year E&Ps had an average 28% of total production hedged through the end of 2015. The small and mid-sized E&Ps increased 2016 hedging the most during the first half of 2015, while the large E&Ps remained mostly unhedged. The weighted-average hedged prices in place for 2016 are $3.83/Mcf of gas and $69.04/bbl of oil.
"The North American E&Ps remain largely exposed to low prices in 2016, with just 11% of their total production hedged for the year, at hedged prices significantly below those locked in for 2015," said IHS Energy's Paul O'Donnell, who authored the report. "For the smaller companies, the combination of less hedging and lower oil prices does not paint a pretty picture for 2016.
E&Ps that missed the opportunity to lock in relatively higher oil prices during 2Q2015, he said, "will face pressure" to curtail drilling activity and capital expenditures (capex) "to avoid further balance sheet deterioration."
Capex for the North American E&P group is expected to decline by 25% in the last half of this year from the first six months to $45 billion from $60 billion.
The small E&Ps reviewed "have hedged 25% of estimated 2016 total production and continue to have the weakest balance sheets," the report said. Midsize E&Ps have hedged 26% of estimated 2016 total production.
"The large North American E&Ps have hedged just 6% of 2016 production and will rely more on their stronger balance sheets to weather the low prices," O'Donnell said. "No oil-weighted large E&Ps have any significant hedging in place for 2016."
The E&P sector is busy reducing their costs, and IHS estimates that companies may be able to earn a similar rate of return at $60/bbl oil than they used to generate at $90.
"The rebound in oil prices during the second quarter created a window of opportunity for operators to lock in 2016 oil volumes at stronger prices," O'Donnell said.
The recent decline in oil futures prices "suggests that operators will be unable to lock in new hedging volumes at attractive prices." Futures prices for West Texas Intermediate as of Sept. 29 do not reach $60/bbl between now and 2020.
"Those that missed these comparatively higher prices in the second quarter will likely be exposed to market prices next year, while those companies that layered in additional hedging appear to have made the correct choice," O'Donnell said.