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Hi E121 - 12.44 If only I read the small print I wouldn't have posted my 11.31 post because it is there in black and white. However, I am not the only person here who doesn't read the small print so we are doubly grateful to you. It is confusing for some when you say hedging is not trading when that is exactly what many hedge funds do! Throwing around terms can easily disguise what actually happens and some posters might like to label EnQuest management as inveterate gamblers when there is no evidence and restrictions in place to prevent them anyway. Our creditors scrutinise everything and that combined with company discipline makes this a well run company imo.
There is some flexibility whereby they can hedge up to 3 years [interesting point is this basically how far out prices go?] with the proviso that hedges are to a maximum e.g. 75% first year. They could decide not to hedge anything and that I would consider imprudent. As always it is in the timing and if you thought the price was going through a $100 you would greatly reduce your hedge. I still don't know why they prefer options to swaps but I trust their choices. I might ask at next AGM after the meeting. It is not the most important information but strike prices on a volatile market do matter. Whether it's futures, options, swaps or even a fixed bilateral deal they are all related. Even the OZ deal. It does get complicated and I'm glad there are a few here that can have a stab at unwinding the trades and translating them into layman's (bulletin board) words.
I learn from other's posts and only throw stuff into the mix that helps me see through the mist.
Be lucky
Hi TW, Yes, but do you want them to hedge at 60 now for Q2? Unless they didn’t inform us about all hedging done in last update that would be the case. I was checking some reports on PMO back in early 2018 and around that time they hedged 1-2 years into the future 20-30 % volume. They were early in 2018 so they only got around 60-65 usd something. If you look on there reports around jan-March I think you find it
I agree E121. And so based on the latest update ENQ are hedging around 50% of production in Q1 2019. I would certainly like to see more in the pipeline for later in the year.
Do we know how much ENQ's peers are hedging?
Afternoon Romaron,
LIke I said in one of my earlier posts - Hedging is not equal to financial trading. Enquest (and other fiscally prudent oil companies) see this as a mechanism to have predictable cash flows and not be subject to the vagaries of the spot market that makes cash flow/profit forecasts as reliable as the result of a coin toss. Enquest has already stated the following in the 2017 AR and I'd view the level of contemplated hedging as a prudent cash flow protection mechanism.
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Commodity price risk – oil prices
The Group is exposed to the impact of changes in Brent oil prices on its revenues and profits generated from sales of crude oil. The Group’s policy is to have the ability to hedge oil prices up to a maximum of 75% of the next 12 months production on a rolling annual basis, up to 60% in the following 12 month period and 50% in the subsequent 12 month period.
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I agree that ENQ won't be indulging in naked hedging - for example, trying to financially hedge Magnus 75% barrels that can't be hedged as per the Magnus SPA and must be sold at spot prices. This is what some of posters on here were suggesting that ENQ should do, but that to me would be a NO-NO. I don't believe there are any hedging restrictions imposed in Enquest by the debt covenants themselves. In the past, I've scoured through the AR to validate this too.
In the last update, ENQ only revealed what was hedged in Q1, but I wouldn't be surprised if more would've been hedged for the following quarters.
Hi Romaron, With underlying production its not about financial trading and “ having a punt”. As long long as you stay within your production levels. Its about securing future cash flow in my opinion With your reasoning, they should not work with hedge at all.
Hi E121 - With the lenders breathing down the neck of EnQuest it is obvious to me that they [Creditors] would not look kindly on EnQuest using financial trading as a way to reduce debts. EnQuest is an oil and gas production and development company, not a financial trading company. All their finances will be scrutinised and AB has to be prepared to explain the decision behind the company's actions. "I was having a punt" would not be an acceptable reply. All trades have to reflect back to the company's underlying business.
I'd speculating if I said I knew the answers to your 2 questions. I really doubt they'd have hedged anything for Q2 since oil got in the 60s, but it's possible they may have taken on some downside protection early in November when Brent was still in the 70s. That would've been good, but the down leg in oil was so rapid that I'm sure it caught almost all in the oil industry by surprise and hence, I'm not so sure.
I'm looking at the McDaniel site mcdan.com last forecast for October 1 2018. The spot price of 1st Oct 2018 was c.$84.
McDan have front end forecasts as 3m 2018 78.00, 2019 $74.00, 2020 $73.10, 2021 $72.30. I think that is long enough for EnQuest holders. It does show that like oil tankers it takes a lot to move the forward price. You can have fun looking at past forecasts and for example in the Jan1 2018 one the spot was c.$66 and the 2021 was $70.10
July 1 2017 spot $c. $48 2021 $71.50.
Commodity swaps have esoteric terminologies and I tried reading how they work but it is aimed at people who love mathematical formulae but the gist is it is the spot price of oil and the forward part is the cost of storage of oil, refinery demand etc....and can move higher or lower for quite long periods (contango, backwardisation). I was something of an expert in FX forward interest rate swaps (27 years) and can tell you that they were quite simple in the same way that fitting a boiler is simple. Could the fitter explain a pcb. He just connects colours and numbers when putting a new one in. Do them long enough and they become second nature. I knew some oil traders and I doubt their swaps were any more complicated. Most don't understand the next stage behind them which is why investment banks and algorithm writers can make so much money. Swaps are huge in FX and the biggest commodity swap is Oil. I'm sure that EnQuest look at all options when deciding on future sales. I don't know how long oil swaps go but I'd be surprised if much was done beyond a year whilst the heaviest period would be 3 months. There may be restrictions on what EnQuest can do within covenants? Like banking it could be dangerous giving a license to trade to a small oil company that then trades amounts like BP. there will be credit limits extended to participants in the swap markets and I dare say the UK oil authorities want financial returns from companies in their jurisdiction. The company is prudent most of the time and maybe they're full on swap limits. Unlikely I'll admit but we're not gonna be told anyway. Criticisising them for not selling all their output when spot was $80 is probably not simple. Was it heading for $100 in their opinion or were they restrained by financial limits relating to production or balance sheet? Maybe they do enter swaps. I'd certainly expect them to but TBF whether it is an option, a future or a swap there won't be a massive difference. They all interconnect.
Thanks E, I hope they use that strategy next time if we hopefully reach 80 again. Being at current 60 usd, you think they choose to not hedge anything for Q2? Do think there any chance that they already had more hedge in place that they gave information about in last update? I think next update not so good on debt side as 100 milj payment to BP. Then they might have chosen to keep further good news about more hedge in 2019. To weigh up the next update.
Correct about Fixed Swaps, Pelle. This is locking into a fixed price at a future data and this what ENQ used back in 2015 to hedge 10 million barrel oil sales for 2016. That hedge transaction netted ENQ more than $200 mill additional revenue in 2016.
Swaps shouldn't cost as much as you indicate below - those costs you listed below look more like 'near the money' Put option premiums.
Hi, If I understand it correctly it doesn’t cost much if use swap contracts. Cost was like 1 usd first 3 months, 2-3 usd 6-12 months out. Using this type of hedge your fixed to that level. In sept/Oct it was possible hedge all 2019 at 80 but they choose another strategy and hedged with floor at 70 but still keep upside for Q1. I have a link at home computer that I think E send before.
TWalby - Hedging costs are a function of the current market price, date of hedge expiration and the strike price and this is purely talking of options. When the current market price is circa $60, you can't really go and hedge at $80 - a put option would circa $23 a barrel at that strike price for middle of next year, and doesn't make sense. You can only look to hedge closer to the current market price.
I'd posted a link to Romaron a couple of days ago - please read through my previous posts and check that link for WTI options costs. It gives you an idea for options costs for WTI and it'll be similar for Brent too..
I agree. Do we have a (rough) idea of what the current price of hedging is? For example, hedging at $80 would cost around $5 per barrel.
Obviously this would not currently be possible given the POO at present but am trying to get a feel of what the cost is.
I read an article some time ago saying its very few short times price settling around that range historically. I hope we reach above 80 sometime next year and then they hedge a bigger part on that level. So we safely can work down the debt
BofAML forecasting POO settling at $70 a barrel in 2019. I would certainly take that for the year.