Oil producers aren’t betting on the rally.
Bloomberg reports that after surviving two years of low prices, oil producers are gearing up for a third by buying protection against a renewed downturn. Laredo Petroleum Inc. announced Thursday that it hedged more than 2 million barrels of 2017 output earlier this month. Drillers have increased bets on falling prices by 29% this year.
Crude has declined more than 10% since hitting a 2016 peak in early June, stoking fears of another second-half slump. It was July that broke the back of last year’s bull run, with oil plummeting 21%. The prospect of a repeat has drillers doing everything they can to raise cash, from selling stocks and bonds to adding fresh hedges.
“The producers have sold the hell out of this rally,” says Stephen Schork, president of Schork Group Inc., a consulting firm in Villanova, Pennsylvania. “The companies that did survive, they’ve been hedging into this rally. And they’re counting their blessings.”
Hedging has become a critical cash lifeline for companies that have so far survived a bust that has claimed dozens of their competitors. Since the start of 2015, 85 North American oil and gas producers have gone bankrupt, according to law firm Haynes & Boone LLP.
Producers increased bets on falling prices for a third consecutive week in the seven days ended July 12, according to data from the Commodity Futures Trading Commission. Short wagers rose by 8,566 futures and options combined, or 1.6%.
Drillers are also taking advantage of the rally to tap the capital markets. U.S. oil and gas producers have been selling shares at record speed, using the cash to repay debt or buy oil and gas prospects, bolstering the asset side of the balance sheet. So far this year, companies have raised more than $16 billion in equity, according to data compiled by Bloomberg.
“They’re trying to generate cash to stay alive and fight another day,” says John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. “The producers know full well that the oil market is not out of the woods yet.”
Bloomberg has the full story.
