US shale producer EOG Resources has cautioned that its oil and gas hedges will hurt its third-quarter results. In an October 9 filing with the US Securities and Exchange Commission (SEC), Houston-based EOG warned of a non-cash loss of US$52.1 million in the third quarter on commodity derivative contracts.
In the filing, EOG cited a difference between its realised price for crude oil and gas sales during the quarter and the prices due at New York Mercantile Exchange (NYMEX) delivery locations as the reason for the loss. It said that benchmark crude prices had averaged US$69.50 per barrel during the quarter, while it had hedged 134,000 bpd, or about 35% of its prior period’s production, at roughly US$60 per barrel.
EOG is nonetheless thought to be better positioned than some of its peers in terms of its hedging exposure. Estimates earlier this year by Bloomberg New Energy Finance indicated that EOG was the least-hedged US producer for 2018 by percentage of crude production, with just 9% of output hedged. According to Refinitiv I/B/E/S, EOG is still expected to report a profit of US$1.48 per share in the third quarter compared with a profit of US$0.19 per share in the same quarter last year.
Between 2015 and 2017, during the oil price downturn, US oil companies generated US$23 billion in gains from hedging, according to Wood Mackenzie. Producers were typically hedging barrels at higher-than-market prices to lock in future production and insulate against the low crude prices. While the recent oil price rally has been a boon for US producers, those that have hedged future output at prices capped below current crude price levels are looking at upcoming losses.
Hedging contracts could result in US$7 billion in losses if WTI prices were to stabilise at US$68 per barrel this year, Wood Mackenzie said in April. According to the consultancy, most companies hedge around 30% of their oil production on average, so they have enough output to sell at full market price and book gains when crude prices are rallying.