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Hi L7 - I feel sure that the negotiators never used the word "FORCED" but it appears that the RBL consortium exerted pressure to get what I agree seems a high figure for hedging compared to the EnQuest deal. But who knows what was in the mind of the HBR negotiators? At the time Covid was a bigger threat and maybe their view was maybe that oil might test the downside again so didn't kick back too hard. We'll never know but it does indicate that EnQuest got the better deal. If oil had collapsed then HBR would have possibly got the better deal. I wasn't arguing that HBR weren't pressured into the hedging, just that they may well have intended to hedge around those levels anyway.
I like HBR and use them as a yardstick for EnQuest. The problem there is what EIG intends to do with their large holding once they're allowed to sell. They have highlighted how things rapidly change in the oil world and because our gas production is relatively low in percentage terms I have ignored it to an extent. Glad that you bring counter arguments and get us all thinking.
My views on hedging are that unless you are an oil trader you use them as protection against your production/order book and leave the wider speculation to the experts who actually aren't experts. They're just at the sharp end with contacts, information and data that they receive before almost everybody else.
In the land of the blind the one-eyed man is king. Some call him "expert".
Agree Chilts - we'll now see increased rhetoric of runaway inflation and how that'll hurt economic recovery. NBP is continuing its inexorable rise to new all-time highs - up another 7% today.
We'll see noises from Biden team soon - not that it'll help.
OPEC will be very happy but as gas soars oil becomes cheap so the pressure will remain as Northern hemispheres winter increases demand
As expected $80 Brent - what will the big players do now?
I think we will see big pressure by world leaders, including Bidden, to push OPEC+ to open the taps.
OPEC+ are still in control and have plenty of capacity still in reserve - my guess is that we are close to the top of the market now with a clearly defined trading range between $65-$75 - $80 is too high for the global economy.
Looks like oil prices are going to $100
Seems like those oil companies with a reasonable amount of shorts are performing the best . Closing them seems a priority, I don’t think we have that many , if any , so no turbo boost for us
I would guess us producers hedging is one of the reasons behind the significant backwardation. Means more production, but there is a limit to it
Hi E121, thanks for checking my numbers.
You highlight HBR hedging losses. I pointed out the 30% requirement FORCED on HBR for their 24-36M production, while ENQ has been politely requested to hedge only 10% of their production over the same period. Given the backwardation in the current market this is a handicap to HBR. The hedges are largely legacy issues and I'd say priced into the market. In fact I found much in the the recent HBR update positive from here on. But my focus isn't on HBR.
I agree that I was less bullish on the oil price than most, but I'd argue my concerns were more on the level achievable than the duration. If, say, I anticipated a pull back below $60 I wouldn't have remained invested in ENQ. I'm still here and happy to be invested, and fair to say a bit more bullish on oil than I was at the start on the year. GE was a great move by AB and good cover for the RBL refinance. L3 correctly highlighted my observations on Suncor taking a significant chuck (30-40% from memory) of the price rise to $65 in contingent, if it that price holds the next two years. But that was in a time of c$60 oil. With GE performing ahead of expectation and oil @$78 this is the time to milk it. At these levels the contingent isn't as significant. A happy place for ENQ holders.
I've made my comments on hedging and repeat that my views on future strategy are irrelevant. It's the decision makers that matter. You've pointed to the Malik brothers and reading their bios it looks like your right. They have the finger on the trading button. But given the scale of the potential gains and losses in the hedging activity I'd hope they are taking outside advise. The in-house view is a bit too close to the last years damage to the company's employee base, potentially leading to a conservative bias. At such times an outside perspective can be beneficial.
Yep, those guys in the big hats are likely to turn on the shale taps, but my reading of commentary suggests the market sees this. The sounds coming out of China make me think they now have concerns about oil supplies. I'm inclined to think the Chinese leaders have a better insight into such matters than 5-year term western politicians. Which I suspect will be good news for long term oil bulls.
Hi L7 - good to hear from you and that all's well. Your workings look good and you've thrown out a variety of hedge scenarios which make sense to me. Harbour's primarily got shafted with their gas hedges. Even as of 30/06, their mark to market hedge losses (PV) was more than $1.1 bill and it's likely they're looking at over $2 bill mark to market losses with gas prices being where they are. They've not taken those numbers onto the P&L, but I suspect will be recognising losses on the P&L when these hedges are settled.
For Enquest, I think it's worth looking at a put only model. I know you were never convinced that this oil rally would last and I've been the polar opposite. I'm not in the uber bullish $100 camp for Q4, but we may see a circa 80 average in Q4. A ot depends on how OPEC reacts in the next couple of months, once Brent sits in the 80s for a few days/weeks. Shale will be hedging ferociously and will bring additional drilling/production back on in 2022, and that's a near certainty. And there's Iran and Covid always lurking in the background. This is why I'd advocate at least 50 to 70% hedge at 70 plus - will save us pain if prices pull back.
I'm not sure if Enquest had advisors for their hedging strategy - it may just be an in-house 'hedge desk' run by the Finance team under the Salman brothers.
Bloomberg just reported Goldman have increased their Brent year end forecast to $90. Expected in Dec/Jan
Seems like 30p target imv. But note in the past , the strongest oil companies move up first and then the rest follow later on. Enquest need to deliver GE and Malaysia on time and impress the market . I would delay any more hedging till end of year.
Sorry I can’t give you heads up, that itself might cause a collapse. Lol.
I agree with you 500+500m loan is a level they mention themselves as good position.
It’s a net debt 700m then.
According to my calculations we will reach this within 9-12 months with current oil prices.
Thanks Pelle. You say, "Hedging is not good in upwards oil market as it will cost or cause some loss."
I agree, but the hedging requirements of the RBL are clear. The question becomes, which option type to utilise.
I've tried to describe the merits of each. Enquest appear to favour costless collars and the environment I described in my last post best suits that type of hedge. As I said, I can't influence the decision. I can only observe and trade accordingly.
I also agree with your point about a continuous roll out. The hedging payback comes when the oil price goes into decline, as it will periodically, and I'm not referring to monthly fluctuations. I'd appreciate any heads up you can give me ahead of the turning point. ;-)
On your follow up post. Again, I agree. A c$72.5 swap for July 2022 is available. Perhaps Enquest are taking these up, but there is a limit to the hedging level. Enquest has it's own maximum remit of 75% on the next 12 months. Perhaps they want to keep the power dry for better future pricing. It's the advisors job to align the option timings with JS's briefing on production, expenditure and refinancing profiles.
Enquest's bond refinancing options are interesting. I noted the exchange between you and E121. I've no doubt the current focus is paying off the RBL ASAP. The sooner that happens the more options available to Enquest. A good outcome would be repaying some of the existing bonds ahead of refinancing new HY Bonds. For me, closing 2023 with a c$500m Bond and c$500m RBL would be a good result.
Good posts l7!
Havent thought about it before but now it strikes (pun intended?) me that the requirements on hedging might be a reason for Enq to give somewhat (more) pessimistic production forecasts going ahead. What do you guys think about that?
Even if the common consensus within the company is poo will start to fall it is better to be "free" when it comes to hedging strategy, and hence public production forecast as low as possible while still making sense. Hopefully they can anyway be somewhat more investor friendly when it comes to e.g. fcf forecasts and shareholder returns.
To answer my own question, looking at your part 1 swap example. 72,5 oil in July basically without cost if I understand it correctly.
So around 12 month above 70 oil possible.
That’s 74 average over the 12 months guarantee.
That’s a nice situation.
Barclays don’t need look at 60 oil base case anymore
I think getting this as right as possible is more important than rush GE completion as I wrote before.
Hedging is not good in upwards oil market as it will cost or cause some loss.
But continue roll it and you get higher and higher levels.
The profits of hedging comes the day market start go down so that’s why it’s important continue roll.
Not like they did before, reduce or end hedge just before collapse twice.
We should also have in mind current oil price is way above any analyst assumptions.
Barclays had 30p target at 60 oil base case and 50p with 70 oil. How far horizon they can hedge with swaps above 70 oil now?
Another benefit will be a more stable future, and can promise dividend earlier for example.
Will be very exciting times
as always, I enjoy your vivid imagery.
The bottom line on my ramblings is that a slowly rising oil price with relatively low volatility is a good environment for costless collars. An environment that seems to suit OPEC+ too, so here's hoping.
When you say "anyone else" could check your maths I think you are being overly generous. I sat through some intro to oil hedging videos today and you might as well dip me in chocolate and throw me to the lesbians., I'm none the wiser.
Appreciate your input and enjoy the craic.
In the downward direction there’s negligible difference between the collar and Put floor prices. For the Put, I deduct the premium from the strike, 77-10=$67.
Put prices with lower premiums are available, but this also lowers the strike and the resulting net floor. I believe you need to be strongly bullish on oil prices to follow a Put only strategy. Over a year, based on 60% of Enquest expected volumes the premium cost would be c$100m.
Ithaca publish the detail of their hedging in their 2021 H2 report. They have a mix of Swaps, Puts and Collars, but for the 2022 Puts:
Ithaca has 2022 oil Puts at an average Put strike of $64 and average premiums of $7/bbl, for a net floor of $57. As far as I can judge these puts were placed during 2021 Q2 somewhere between an oil price of $63 and $70. I guess at the time they anticipated a higher price. At the current price of $78 they are in the money with strike plus premium = 64+7 = $73. If that price holds thro 2022 the Puts were a better call that collars are the time the hedge was placed.
But I wonder if they would make that call today at Brent $78. I look forward to their Q3 update.
Given the numbers we can all have a personal view on Enquest’s hedging strategy but none of us have any influence.
Enquest had a $30m hedging loss in H1 and I’m expecting something similar in H2. These are significant numbers so I’ve no doubt that they have specialist advisors on hedging. Like say a financial advisor assessing your retirement plans, wanting to know your circumstances and plans, these hedging advisors will have a clear brief on EnQuest’s future production expectations, capital expenditures, decom costs and, not least, their Bond refinance schedule. (This is the second consideration on option strategies I referred to earlier)
I have to trust the advisors do a decent job, but hedging is like the casino. Visit once and you might walk away with a significant gain but visit every night and the ‘house’ will take a percentage.
I like Aloj’s reference to a “perfect storm”. Focus on the operational side and any gains over expectations are unhedged and leveraged to the full oil price.
I don’t know if it was a stroke of genius or a stroke of luck, that JS avoided the 50%/40%/30% minimum hedging requirement placed on HBR. The oil price would have to fall significantly to make that 30% of production hedged out 2-3 years come into the money.
I picked out those numbers for HBR from the call. I think I heard them correctly.
I'd be very happy for E121, L3 or anyone else, to check my maths, just in case I have this wrong. Though it's academic. The important thing is that Enquest's advisors get their maths right.