1Q 2020 Oil & Gas Market Update

You don’t need to look far to find negative headlines these days, and global oil and gas markets are no exception. With both demand-side and supply-side shocks in play, the current pricing environment is bleak, with WTI down approximately 60% in the last 30 days.

With no clear relief on the horizon, market participants are trying to assess the implication of this new pricing paradigm, especially US shale E&Ps. To better understand the ramifications, we dug into the flurry of recent press releases on their financial status and development plans, with a focus on forward hedging.

We selected 8 US E&Ps of varying sizes and basin focuses, all with a majority of their production being oil focused. Working from these press releases and recent earning statements, we aggregated their average hedge percentage of daily oil production and charted with the average price across their hedge book (given the current environment, we excluded instruments not providing downside protection).

“It's only when the tide goes out that you learn who has been swimming naked.” – Warren Buffett

While there will no doubt be some restructuring of these hedge books over the coming weeks, this strained environment highlights how critically important hedging remains for E&Ps. Those companies that chose to be well hedged and focused on downside protection leading into year-end 2019 (vs. three-way collars for example) will find real value in their hedge strategy. More importantly, they will have more capacity to ride out the storm. Hedging will be a key determinant of this cycle’s winners and losers.

Tellus Hedge wishes you and your families well during this challenging time. We look forward to continuing to provide our E&P clients tools to access liquidity, as hedging only becomes more important in the current environment. For those that have not done so already, please reach out to sales@tellusmarkets.com to schedule a demo of our electronic hedging platform.

Footnote: Chart based on data available from public company filings and press releases as of March 25, 2020. Production averages based on 2019 totals and hedge % based on 2020 guidance, with granular detail as provided by companies. For multi-leg instruments, only the floor price was included in the average above. WPX and PDC numbers inclusive of Felix and SRC mergers, respectively.

March 27, 2020