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As the oil price downturn continues unabated, producers are hedging future production in order to lengthen their lifelines as March interest payments loom large.
February saw producers start hedging for the first time in months, hoping to lock in prices at $45 for the next few years—just in case.
According to Reuters, last Thursday, U.S. crude for December 2017 delivery fell more than 2 percent to $43.47 per barrel, partly due to producer hedging. WTI for 2017 rose up to $43.55 per barrel, compared to January’s record low of $37.38 per barrel.
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Citing swaps data from the Depository Trust & Clearing Corp., Reuters noted that trading volume in over-the-counter oil swaps was more than five times higher than the past three days combined.
The renewed hedging comes as shale interest payments are due in March, and producers are under tough pressure to ensure they will be able to make good on their debts.
By the end of March, the U.S. shale industry will have a combined interest bill due of $1.2 billion—some 50 percent of that owed by companies that have junk-rated credit, according to Bloomberg. By the end of this year, $9.8 billion in interest payments will come due for the shale industry.
Some have already missed their payments, including a $21.7 million interest payment by SandRidge Energy Inc., and an $8.8 million payment by Energy XXI Ltd. SandRidge can apparently make the payment, but chose to make use of the 30-day grace period.
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A total of 48 oil and gas producers have declared bankruptcy in North America since January last year, leaving unpaid debts of some $17 billion, according to HaynesBoone law firm.
As of the beginning of this year, we’re looking at $325 billion in debt for American’s cash-flow negative producers, according to ZeroHedge.
And banks are getting a bit nervous because of all the pressure coming from investors who aren’t keen on the emerging default picture in the oil and gas industry—despite the fact that most banks’ overall portfolios only have 2-3 percent lending to this sector. The KBW Bank Index has fallen 16.7 percent since the 1 January 2016.
March will definitely be madder than usual—an unforgiving month that can apparently only be tolerated with more hedging on futures, even if it means locking in a dismal price of $45 for the next few years. It’s not a nice price at all; rather, it’s just a frayed lifeline.
For others, the lifeline is in share selling. Devon Energy Corp. is shooting for $1.3 billion through share sales that represent one-quarter more shares than originally planned, and at a 7.8 percent discount. Pioneer Natural Resources Co. earned $1.4 billion in January in a share sale, at least five others are doing the same, according to Bloomberg.
But the trap here is that if the hedging works, interest payments are met, and increased share sales prop up coffers, it could actually work to worsen the global supply glut, because that lifeline means more drilling.
By James Burgess of Oilprice.com
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James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…