- According to Standard Chartered, the U.S. oil hedge book volumes rose 15.5% q/q in the third quarter, but hedge volume remained 62% below 2020 levels.
- Meanwhile, the natural gas hedge book fell 4.2% q/q to a seven-year low, with 32.9% of 2024 output currently hedged.
- StanChart says its analysis shows that hedging liquidity is not likely to be adversely affected by the increasing speed of consolidations.
Oil and commodity producers as well as heavy consumers frequently employ a variety of hedging strategies to protect themselves against market fluctuations. Oil producers typically use a short hedge to lock in oil prices during times of falling crude prices, if they believe prices are likely to go even lower in the future. The reverse usually happens when oil prices are rising with producers hedging only lightly in order to benefit from higher prices.
Last year, the vast majority of oil and gas producers ditched most of their hedges as both commodities soared to record highs amid the global energy crisis following Russia’s war in Ukraine. Oil markets have been far less generous in the current year, with oil prices having undergone a 40% correction from their June 2022 peak. But U.S. producers are not convinced there’s much downside to oil prices, if current hedging activity is any indication.
According to Standard Chartered, the U.S. oil hedge book volumes rose 15.5% q/q in the third quarter, but hedge volume remained 62% below 2020 levels during the infamous oil price crash. StanChart has revealed that U.S. independent producers have hedged just 16.5% of 2024 output, with the average 2024 swap at $70.31 per barrel (bbl) in WTI terms while the average two-way collar has a floor of $64.94/bbl and a ceiling of $86.58/bbl.
Meanwhile, the natural gas hedge book fell 4.2% q/q to a seven-year low, with 32.9% of 2024 output currently hedged with an average swap price of $3.42 per million British thermal units (mmBtu) and an average two-way collar with a floor of $3.36/mmBtu and a ceiling of $5.19/mmBtu.
Increased M&A Will Not Affect Hedging Liquidity
StanChart notes that the sharp decline in oil and gas hedged volumes in recent years has triggered fears that hedged volumes could fall even lower and take an even heavier toll on market liquidity. It’s a valid concern regarding the growing merger mania in the U.S. Shale Patch.
In early October, the Wall Street Journal reported that Exxon Mobil Corp.(NYSE:XOM) is planning a takeover of fellow shale operator Pioneer Natural Resources (NYSE:PXD) in a giant $60B deal. Exxon held preliminary, informal talks with Pioneer earlier in the year about a possible acquisition and also discussed a potential tie-up with at least one other company as it seeks to expand its already formidable operations in the U.S. shale patch.
A merger with Pioneer would be Exxon's largest M&A deal since its purchase of Mobil in 1999. Pioneer is the Permian Basin’s second-largest producer by oil production, and an entity formed by the company and Exxon would make Exxon the largest producer in the Permian with production potential of ~1.2 million boe/day, overtaking current leader Occidental Petroleum (NYSE:OXY).
The deal came a few months after Exxon announced it had agreed in July to buy Denbury Resources (NYSE:DEN) for almost $5 billion in all-stock deal. Exxon closed the Denbury deal in early November.
A few weeks later, Chevron Corporation (NYSE: CVX) entered into a definitive agreement with Hess Corporation (NYSE: HES) to acquire all of the outstanding shares of Hess in an all-stock transaction valued at $53 billion, or $171 per share.
Meanwhile, WSJ has reported that ConocoPhillips (NYSE:COP) is fishing for potential deals in the shale patch, adding that smaller producers are increasingly signaling a willingness to be bought if the price is right. To wit, CrownRock, one of the Permian’s biggest private producers, has hired bankers to advise it on a potential deal with an asking price of $10 billion to $15 billion,
Thankfully, StanChart says its analysis shows that hedging liquidity is not likely to be adversely affected by the increasing speed of consolidations.
In the figure above, StanChart shows hedging volumes held by companies that have joined the two US majors, or which have pending transactions, separately. StanChart notes that,
‘‘In the case of one grouping, hedge volumes became insignificant two years ago as a result of consolidation and also due to changes in hedging strategy. Volumes hedged by companies in the other grouping constituted 15% of the publicly listed hedge book in Q1-2023, a significant volume but more than fully offset by the increase in hedging by other companies over the past quarter.’’