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CENTENNIAL RESOURCE DEVELOPMENT, INC.

(CDEV)
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Missed opportunity: hedges to crimp U.S. shale oil producers' first quarter profit

04/26/2021 | 11:11am EDT
FILE PHOTO: Dust blows around a crude oil pump jack and flare burning excess gas at a drill pad in the Permian Basin in Loving County

(Reuters) - U.S. oil and gas operators face billions of dollars in hedging losses that will weigh on first quarter earnings as this year's oil-price recovery left dozens selling their oil at below market prices.

Companies including Cimarex Energy Co and Concho Resources that locked in prices on some of their volumes when prices rebounded last year to around $40 per barrel missed some of the price jump, and Concho owner ConocoPhillips paid millions of dollars to unwind those contracts.

Benchmark U.S. crude prices have doubled from year-ago levels, averaging over $58 a barrel for the quarter ended March 31. Hedges and a February freeze that temporarily slowed output, are expected to crimp the benefits of higher prices as U.S. oil producers report earnings in coming days.

Dozens of producers hedged at prices below $50 a barrel, according to Andrew McConn, co-head of commercial intelligence of energy data firm Enverus. Its review of 66 producers found roughly $7 billion in aggregate hedging losses.


(For a graphic on oil company hedges, click here:https://tmsnrt.rs/3tYf1VS

PRESSURING BUDGETS

Oil and gas producers use hedges as a form of insurance to lock in prices for future production. Hedges protect them from potential price drops and provide guaranteed revenue. But it can chill gains from a rising oil market.

This year's hedging losses will add pressure to keep expense budgets fairly conservative, McConn said, potentially dampening spending on drilling until hedges roll off and companies can get market prices for all their oil.

Several companies warned investors about first quarter hedging losses. Diamondback Energy anticipates $102 million in hedging losses after selling a portion of its oil at $46.81 a barrel. Cimarex warned of $162 million loss on oil and gas derivatives.

Unwinding out-of-the-money hedges acquired in January with Concho Resources cut ConocoPhillips pre-tax earnings by $300 million, it said in a March filing.

Chesapeake Energy hedged some 19 million barrels for 2021 at a price of $42.69 a barrel - a figure that represents a little more than half of its 2020 oil production, according to filings.

Chesapeake declined to comment.

UNCERTAIN PRICING

Hedging made sense given the uncertain market last year, said Trisha Curtis, chief executive of PetroNerds, an oil and gas consulting firm that tracks hedging and derivatives.

Hedging in the $40s per barrel range probably felt necessary, while hedging in the $50s made sense, said Curtis with the Organization of the Petroleum Exporting Countries (OPEC) last year signaling it may relax production curbs that have boosted prices, she said.

While the $7 billion in losses is substantial, oil companies should still benefit from this year's prices, said John Saucer, of commodity advisory firm Mobius Risk Group. Most companies typically hedge about half their volumes.

"If you have the appropriate hedge ratio, you should want to lose money because you're making money on the other part of your portfolio," said Saucer.

(Reporting by Liz Hampton in Denver; Editing by Marguerita Choy)

By Liz Hampton


© Reuters 2021
Stocks mentioned in the article
ChangeLast1st jan.
CENTENNIAL RESOURCE DEVELOPMENT, INC. -2.98% 5.21 Delayed Quote.247.33%
CHESAPEAKE ENERGY CORPORATION -2.33% 54.05 Delayed Quote.0.00%
DIAMONDBACK ENERGY, INC. -3.03% 77.13 Delayed Quote.59.36%
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Financials (USD)
Sales 2021 853 M - -
Net income 2021 70,4 M - -
Net Debt 2021 928 M - -
P/E ratio 2021 17,3x
Yield 2021 -
Capitalization 1 455 M 1 455 M -
EV / Sales 2021 2,79x
EV / Sales 2022 2,31x
Nbr of Employees -
Free-Float 62,8%
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Sean R. Smith Chief Executive Officer & Director
George S. Glyphis Chief Financial Officer & Vice President
Steven J. Shapiro Non-Executive Chairman
Colleen C. Proctor Vice President-Information Technology
Matthew R. Garrison Chief Operating Officer & Vice President
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