Hedging in a Low Price Environment –
Does it Make Sense Now?
Louisiana Energy Conference
June 2, 2016
Sean Levine, Director –
Research and Product Development
Energy Capital Research Group
Addressing the Question
Our Panelists
Grant Brady – Morgan Stanley Commodities
Managing Director of Risk Management team
Advises producers, consumers, refiners; also RBL perspective
Rick Couvillon, Jr. – ConocoPhillips Gas & Power
Director of Origination for Energy Services
Works with industrial end-users, private E&Ps in oil/gas sales, hedging
Parker Drew – Tulane University
Adjunct Professor at Freeman School of Business, commodities consultant
20 years as natural gas derivatives trader with Merrill, Morgan Stanley
Joe LeBlanc – PerPetro Energy
Co-Founder & CFO of private, shallow water GOM legacy-asset focused E&P
Directed Tulane’s Masters of Energy program, hedging & trading at Energy Partners, Shell
Mark Rossano – Candlewood Investment Group
Analyst & Strategist targeting alpha-generating commodity, equity & credit opportunities
Tracks hydrocarbon from wellhead to end-use, coverage includes NGLs & condensate
Sean Levine – Energy Capital Research Group
Co-Founder, Director of Research & Product Development
ECRG tracks near-term commodity price moves & upstream liquidity, solvency dynamics
2
Primary Reasons to Hedge
Support a Particular Price View
Lock in Economics/Returns
Necessary to Obtain Financing or to
Enhance Financing Capabilities
3
Energy Hedging Life Cycle
Upset about Hedges
Upset about Hedges
Hedged
Still Upset
Happy w/Hedges
Hedge More
Wished Hedged More
4
WTI – Rebounded but Strip Flat
125
NYMEX WTI
Forward Curve as of 9/6/13
Forward Curve as of 8/24/15
Forward Curve as of 2/24/12
Forward Curve as of 6/20/14
Forward Curve as of 2/11/16
Forward Curve as of 6/28/12
Forward Curve as of 3/17/15
Forward Curve as of 5/27/16
110
95
80
65
50
35
20
2012
2013
2014
2015
2016
2017
2018
Source: Morgan Stanley
5
Nat. Gas – Back to 2012, Only Flatter
7
NYMEX Henry Hub Natural Gas
Forward Curve as of 2/19/14
Forward Curve as of 12/17/15
Forward Curve as of 4/9/12
Forward Curve as of 11/20/14
Forward Curve as of 3/3/16
Forward Curve as of 4/19/13
Forward Curve as of 5/14/15
Forward Curve as of 5/27/16
6
5
4
3
2
1
2012
2013
2014
2015
2016
2017
2018
Source: Morgan Stanley
6
Futures Not Best Predictor of L/T Price
7
Wolfcamp - Reeves (TX)
$0
Spraberry - Martin (TX)
Wolfbone - Play Average
Eagle Ford - Dimmit (TX)
Bakken - Dunn (Manning)
Wolfcamp - Irion (TX)
Spraberry - Reagan (TX)
Bakken - Williams (Alamo)
Bakken - Williams (McGreggor)
Wolfcamp - Reagan (TX)
Spraberry - Irion (TX)
Eagle Ford - Lavaca (TX)
Eagle Ford - McMullen (TX)
Eagle Ford - Atascosa (TX)
Bakken - McKenzie (Alexander)
Eagle Ford - LaSalle (TX)
Bakken - Mountrail (Manitou)
Bakken - Williams (Williston)
Eagle Ford - Zavala (TX)
Eagle Ford - Live Oak (TX)
Bakken - Mountrail (Pershall)
Bakken - Dunn (NW Dunn)
Bakken - Williams (Lewis and Clark State Park)
Wolfcamp - Play Average
Bakken - McKenzie (Watford)
Eagle Ford - Play Average
Bakken - Mountrail (Missouri River Antelope)
Bakken - Play Average
Spraberry - Andrews (TX)
Spraberry - Upton (TX)
Eagle Ford - Gonzales (TX)
Spraberry - Play Average
Spraberry - Glasscock (TX)
Bakken - Mountrail (Belden Township)
Bakken - Dunn (Little Missouri State Park)
Bone Spring - Lea (NM)
Wolfcamp - Ward (TX)
Bone Spring - Eddy (NM)
Spraberry - Midland (TX)
Eagle Ford - Karnes (TX)
Bakken - Dunn (Skunk Creek Bay)
Bone Spring - Play Average
Bakken - Mountrail (South New Town Penninsula)
Source: Bloomberg Intelligence
Bakken - McKenzie (Hawkeye)
Spraberry - Howard (TX)
Bakken - McKenzie (Mandaree)
Bone Spring - Loving (TX)
Wolfbone - Reeves (TX)
Wolfcamp - Loving (TX)
Eagle Ford - DeWitt (TX)
Bone Spring - Ward (TX)
Shale Breakevens Mostly In the Money
$70
$60
$50
$40
Bakken
$30
Eagle Ford
$20
Spraberry
$10
Wolfcamp
Bone Spring
Wolfbone
8
E&P Hedging Evolution: 1Q15 – 1Q16
E&P 2016-2017 Oil & Natural Gas Avg. Hedge % by Reporting Period
E&Ps Sharpened Focused
on Cal16 Oil in Q1
Gas Hedging Continues to
Move Towards 2017
50%
50%
46%
45%
45%
40%
40%
43%
40%
35%
35%
30%
28%
30%
26%
25%
20%
41%
25%
21%
16%
16%
15%
11%
10%
5%
2%
3%
0%
21%
20%
14%
15%
10%
5%
22%
7%
6%
5%
1%
2%
0%
1Q15 2Q15 3Q15 4Q15 1Q16 1Q15 2Q15 3Q15 4Q15 1Q16
2016 Oil
2017 Oil
1Q15 2Q15 3Q15 4Q15 1Q16 1Q15 2Q15 3Q15 4Q15 1Q16
2016 Natural Gas
2017 Natural Gas
Source: Morgan Stanley
9
Most Common Hedge Structures
1.
Put – Very costly, full protection, full upside, no
credit needs
2.
Put Spread – Less costly, less protection, full
upside, no credit needs
3.
Swap – no upfront cost, full protection, no
upside, lots of credit needed
4.
Producer Three-Way (put spread and sell call) –
less costly, less protection, less upside, some credit
needed
5.
“Bourbon Street” Three-Way (Put and sell call
spread) – medium cost, full protection, most upside,
little credit needed
10
Variant Approaches
Distressed Hedging
Techniques
1.
Sell calls in later
years to get higher swaps
this year
2.
Sell below market
swaps to finance other
hedging products (may
not be allowed anymore)
Alternative Structures/
Techniques
1.
Imbedded
derivatives in physical
marketing contracts (less
credit and perhaps built
into the physical
marketing price)
2.
Dynamic hedging
vs. static hedging
11
Investors May Find More Value in Debt
Hedge Upside Challenged by Distance to Par in Light of PD Value
12
Parsley Energy
On-Point With Put Spreads
13
Parsley Energy
Rolling Down Put Spreads
14
Three-Way Collars
15
Pioneer Natural Resources
Hedge Book Dominated by Three-Way Collars
16
Pioneer Natural Resources
Gas Hedges
17
Cal 17 WTI Skew
NYMEX WTI Cal17 Implied Volatility by Delta
NYMEX WTI Cal17
46%
44%
42%
40%
38%
36%
34%
32%
30%
10D Put 20D Put 25D Put 30D Put 35D Put 40D Put 45D Put ATM 45D Call 40D Call 35D Call 30D Call 25D Call 20D Call 10D Call
Source: Morgan Stanley
18
This report has been prepared for the Louisiana Energy Conference by Energy Capital Research Group, LLC
(ECRG). The report is intended solely for the benefit of those present and its contents and conclusions are
confidential and may not be disclosed to any other persons or companies without ECRG’s prior written permission.
The information upon which this report is based has either been supplied to us by third parties or comes from our own
experience, knowledge and databases. The opinions expressed in this report are those of ECRG. Although we
believe the information presented by ECRG in our published resources, at our meetings and during seminars is the
best and most useful available to global professionals and investors today, it is subject to change at any time and we
cannot guarantee its accuracy.
ECRG does not act as an investment advisor or advocate the purchase or sale of any security or investment. The
descriptions of commodities, industries, companies or assets provided by ECRG do not constitute recommendations
to buy, sell, subscribe to or underwrite any security or financial investment of any kind. The information is not intended
to form the basis of any specific investment or other decisions, and ECRG does not advise whether or not
commodities as a whole are suitable investments. Should you still choose to incorporate this information in any
decision to invest, you do so at your own risk, and should only invest after consulting with your investment advisor
and performing your own due diligence. ECRG is not liable for any losses, damages, costs or expenses resulting from
your investment decisions based on using all or any portion of our advice.
Copyright © 2015-Present
Money Map Press • 16 W. Madison Street • Baltimore, MD 21201 • 888.384.8339 or 443.353.4519