Not hedging commodity price risk has been the norm for E&P companies.
When it comes to embarking on active hedging programs, E&P companies have so far been reticent. This lack of initiative is possibly a result of shifting economic cycles.
When it comes to embarking on active hedging programs, E&P companies have so far been reticent.
There are, of course, factors that have been influencing the unsteady market sentiment — prevailing oil prices are expected to generally exceed the cost of production. Even shareholders seem to be reconciling with the shorter-term instability in earnings.
So, from what it appears, none of these trends have been very encouraging for E&P companies.
With continued volatility in oil prices and generally depressed natural gas prices in North America coupled with increasing costs of production, the inclination to not hedge may require to be revisited.
Stabilizing cash flows in the nearer term through hedging, where prevailing prices exceed cost of production by a margin that reflects adequate return on equity may help E&P companies in times of uncertainty.
*Refer to the attached PDF for source information.