Early Hedging Indications for 2021

Rystad Energy recently released an article laying out the early data for 2021 hedging activity by the largest shale oil and gas operators. With US E&Ps having hedged 41% of total guided and estimated 2021 production, there is both room for movement in the data and a large enough sample size to extrapolate some meaningful idea(s) of what is expected in the coming year. Here are a few of the data points worth exploring. Note that the data is somewhat limited, as Rystad considered only the 20 operators who had communicated hedges as of early October, and these collectively accounted for 32% of expected 2020 US shale oil production.

There is a consensus that lower prices prevail.

It should shock no one that 2021 oil hedges, at an average floor price of $42bbl, are significantly lower than the $56bbl floor for 2020. In fact, given the market’s downward trends in recent days, $42bbl is looking even more attractive now than at the beginning of the month.

There is little consensus on how much volatility impacts the average price.

The distribution of hedged volumes is, as the Rystad authors note, quite wide. On one end of the spectrum, only three operators – Ovintiv, Murphy Oil, and Marathon Oil – have less than 20% of their expected 2021 oil production hedged. Similarly, only three – SM Energy, Parsley, and Laredo Petroleum – have hedged above 60%. Aside from general management strategies, this appears to indicate the absence of a clear line of sight to 2021 pricing.

Swaps are in; three-way collars are out.

Also telling is both the continued dominance of the swap as the settlement contract of choice for 2021, as well as the statistically significant drop in the use of the three-way collar. The use of the swap, long the dominant hedging mechanism, is up 15% from February 2020 to a total of 57% for reported 2021 hedging as of October 2020. Equally important, the use of the three-way collar has dropped from 41% in 2020 hedging as of February 2020 to a mere 17% for 2021 hedging as of October 2020. The authors noted that “this change comes as the collapse in the crude market in early 2020 meant that prices broke the subfloor of most of these contracts…” With so much in flux for 2021, this percentage movement is hardly surprising.