The shale industry is set to enjoy its best year, arguably in its history, but some drillers are not benefitting as much as expected because they locked themselves into hedges at lower prices.
Shale drilling has historically been a loss-making proposition. The precipitous decline in output from shale wells meant that companies had to use the revenue from one well to drill the next well. Cash was continuously recycled back into new wells, and shareholders rarely saw any profits flow back to them.
That is set to change this year. “Higher prices and operational improvements are putting the US shale sector on track to achieve positive free cash flow in 2018 for the first time ever,” the International Energy Agency (IEA) wrote in a recent report on energy investment.
But not everyone is raking in as much money as they might have wanted. A handful of shale companies posted lower-than-expected profits in recent days, owing to the fact that they secured hedges for their second quarter production at prices that were lower than the prevailing market price.
Among the companies that undershot expectations were Devon Energy, Anadarko Petroleum and Chesapeake Energy. As Reuters notes, many shale companies hedged at around $55 per barrel in the second quarter while WTI was much higher.
Those hedges were likely secured last year, when oil traded at lower levels. The shale companies locked in those positions as a risk management strategy, guarding…