Oil Drillers Exposed in Three-Way Hedges as Crude Dips Below $30

However, Pioneer added a subfloor at $43. If oil’s trading at $30 a barrel, Pioneer will get about $50, or the market price plus the $20 difference between the floor and the subfloor. The difference adds up. With oil at $40, Pioneer will realize about $845,000 less every day than it would have using the collar with the $63 floor.

Providing Protection

The protection is still significantly better than nothing. Last year, the company’s hedges brought in $875 million and they will pay off again in 2016, said Rich Dealy, Pioneer’s CFO.

"Over the past few commodity price cycles, we have learned the importance of using derivatives to protect margins and cash flow," Dealy said. "We actively manage the types of derivative instruments we use based on our outlook for prices."

Likewise, Bonanza Creek hedged 5,500 barrels a day for 2016, about 33 percent of its production, with three-way collars with a ceiling of $96.83 and a floor of $85. At $40, the trade would be worth about $55 a barrel, or $302,500 a day. However, Bonanza Creek also sold $70 puts, making its position worth just $15 a barrel, or $82,500 a day.

Ryan Zorn, treasurer and senior vice president of finance for Bonanza Creek, declined to comment.

"Nobody expected this kind of downward spike," said Haas, the Wunderlich analyst.

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Dan Stets, Reg Gale.

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