Hedging in a Low Price Environment Does it Make Sense Now?

Transcription

1 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

2 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

3 Primary Reasons to Hedge! Support a Particular Price View!!! Lock in Economics/Returns!!! Necessary to Obtain Financing or to Enhance Financing Capabilities! 3

4 Energy Hedging Life Cycle Upset about Hedges Hedged Still Upset Upset about Hedges Happy w/hedges Hedge More Wished Hedged More 4

5 WTI Rebounded but Strip Flat NYMEX WTI Forward Curve as of 2/24/12 Forward Curve as of 6/28/12 Forward Curve as of 9/6/13 Forward Curve as of 6/20/14 Forward Curve as of 3/17/15 Forward Curve as of 8/24/15 Forward Curve as of 2/11/16 Forward Curve as of 5/27/ Source: Morgan Stanley 5

6 Nat. Gas Back to 2012, Only Flatter 7 6 NYMEX Henry Hub Natural Gas Forward Curve as of 4/9/12 Forward Curve as of 4/19/13 Forward Curve as of 2/19/14 Forward Curve as of 11/20/14 Forward Curve as of 5/14/15 Forward Curve as of 12/17/15 Forward Curve as of 3/3/16 Forward Curve as of 5/27/ Source: Morgan Stanley 6

7 Futures Not Best Predictor of L/T Price 7

8 Shale Breakevens Mostly In the Money $70 $60 $50 $40 $30 $20 $10 $0 Wolfcamp - Reeves (TX) Bone Spring - Ward (TX) Eagle Ford - DeWiF (TX) Wolfcamp - Loving (TX) WolHone - Reeves (TX) Bone Spring - Loving (TX) Bakken - McKenzie (Mandaree) Spraberry - Howard (TX) Bakken - McKenzie (Hawkeye) WolHone - Play Average Spraberry - MarSn (TX) Source: Bloomberg Intelligence Bakken - Mountrail (South New Town Penninsula) Bone Spring - Play Average Bakken - Dunn (Skunk Creek Bay) Eagle Ford - Karnes (TX) Spraberry - Midland (TX) Bone Spring - Eddy (NM) Wolfcamp - Ward (TX) Bone Spring - Lea (NM) Bakken - Dunn (LiFle Missouri State Park) Bakken - Mountrail (Belden Township) Spraberry - Glasscock (TX) Spraberry - Play Average Eagle Ford - Gonzales (TX) Spraberry - Upton (TX) Spraberry - Andrews (TX) Bakken - Play Average Bakken - Mountrail (Missouri River Antelope) Eagle Ford - Play Average Bakken - McKenzie (Wa[ord) Wolfcamp - Play Average Bakken - Williams (Lewis and Clark State Park) Bakken - Dunn (NW Dunn) Bakken - Mountrail (Pershall) Eagle Ford - Live Oak (TX) Eagle Ford - Zavala (TX) Bakken - Williams (Williston) Bakken - Mountrail (Manitou) Eagle Ford - LaSalle (TX) Bakken - McKenzie (Alexander) Eagle Ford - Atascosa (TX) Eagle Ford - McMullen (TX) Eagle Ford - Lavaca (TX) Spraberry - Irion (TX) Wolfcamp - Reagan (TX) Bakken - Williams (McGreggor) Bakken - Williams (Alamo) Spraberry - Reagan (TX) Wolfcamp - Irion (TX) Bakken - Dunn (Manning) Eagle Ford - Dimmit (TX) Bakken Eagle Ford Spraberry Wolfcamp Bone Spring WolHone 8

9 E&P Hedging Evolution: 1Q15 1Q16 E&P Oil & Natural Gas Avg. Hedge % by Reporting Period E&Ps Sharpened Focused on Cal16 Oil in Q1 Gas Hedging Continues to Move Towards % 45% 40% 40% 46% 50% 45% 40% 41% 43% 35% 35% 30% 26% 30% 28% 25% 21% 25% 22% 21% 20% 15% 16% 11% 16% 20% 15% 14% 10% 5% 2% 3% 5% 10% 5% 7% 1% 2% 6% 0% 1Q15 2Q15 3Q15 4Q15 1Q16 1Q15 2Q15 3Q15 4Q15 1Q16 0% 1Q15 2Q15 3Q15 4Q15 1Q16 1Q15 2Q15 3Q15 4Q15 1Q Oil 2017 Oil 2016 Natural Gas 2017 Natural Gas Source: Morgan Stanley 9

10 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

11 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

12 Parsley Energy On-Point With Put Spreads 12

13 Parsley Energy Rolling Down Put Spreads 13

14 Three-Way Collars 14

15 Pioneer Natural Resources Hedge Book Dominated by Three-Way Collars 15

16 Pioneer Natural Resources Gas Hedges 16

17 Cal 17 WTI Skew NYMEX WTI Cal17 Implied Volatility by Delta 46% NYMEX WTI Cal17 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 17

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 or