Shale Drillers Lose Most-Precious Asset - the $90 Hedge

West Texas Intermediate for August delivery added 23 cents to $57.19 a barrel in electronic trading on the New York Mercantile Exchange at 11:46 a.m. London time.

Hedges purchased from banks or other traders allow drillers to lock in a sale price. Some guarantee a specific value. Others ensure a minimum payment regardless of how much the market moves, but require the oil company to pay some of it back if the price exceeds a certain threshold.

SandRidge, the Oklahoma City-based producer, had about 90 percent of its oil and natural gas liquids output hedged in early 2015, according to a regulatory filing. Next year, the hedges cover less than a third. SandRidge stock traded yesterday at 85 cents, down 88 percent in the last year. More than $3 billion of its bonds are trading at 62 cents on the dollar or less.

Jeff Wilson, a spokesman for the company, said declining well costs and increased efficiency are helping SandRidge achieve returns comparable to what the company made at higher prices. SandRidge issued $1.25 billion in bonds last month, which gives the company the liquidity it needs, Wilson said.

Buy Time

For SandRidge and other drillers, the hedges, required by some lenders, gave them enough time to cut spending. Costs in shale fields have fallen by 20 to 30 percent and productivity has increased as producers moved rigs to the most prolific regions. Producers were able to raise about $44 billion in equity and debt in the first quarter, according to UBS AG.

“That postponed the day of reckoning,” said Carl Tricoli, co-founder of private-equity firm Denham Capital Management.

At Goodrich Petroleum Corp., hedges accounted for 35 percent of revenue in the first three months of 2015. Most of its insurance runs out at the end of the year, company records show.


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