North American producers’ hedge cover to fall

Exposure of North American oil and gas producers to low oil prices will increase in 2016, according to IHS.

Hedging protection in place for 48 exploration and production companies will fall to 11% of total production volumes next year from 28% for the remainder of 2015, the firm says in a new study.

The implied weighted-average hedge prices for the group next year are $69.04/bbl for oil and $3.83/Mcf of natural gas.

Midsize E&P companies in the IHS group have the largest share of total production hedged next year: 26%. The group has 36% of oil production hedged at an implied weighted-average price of $69.34/bbl and 18% of gas production at $3.67/Mcf.

Large E&P companies have 4% of oil production hedged at $63/bbl and 10% of gas production at $3.87/Mcf. The hedge share of total production for this group is 6%.

Small companies, with 25% of total production hedged, have 27% of oil production hedged at $76.89/bbl and 28% of gas production hedged at $3.86/Mcf.

“For the smaller companies, the combination of less hedging and lower oil prices does not paint a pretty picture for 2016,” said Paul O’Donnell, principal equity analyst at IHS Energy and author of the report. “Companies that missed the opportunity to lock in relatively higher oil prices during the second quarter of 2015 will face pressure to curtail drilling activity and [capital expenditures] in order to avoid further balance sheet deterioration.”

IHS expects capital spending for the group of companies to drop to $45 billion in this year’s second half from about $60 billion in the first half.

Because costs are falling, IHS believes E&P companies can earn rates of return with the crude price at $60/bbl similar to what they formerly earned at $90/bbl.

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