RE: 25p3 Aug 2021 18:55
Hello L3,
I had a no laptop weekend and binge watched the Olympics and I couldn't respond any sooner. It's good to take your mind off the latest Covid shenanigans - concerns about China localised lockdowns is driving the latest leg of downward volatility in commodity prices - Copper/Oil/Coal all taking a leg lower this week. All said and done, Enquest is holding up pretty well and the Moody's upgrade no doubt helped - even though the actual financials are likely to be much better than their projections for 2021.
If I can comment on what you wrote about hedging - "Buy put at $65, sell call at $72 (the costs even out), and buy call at $80 (at around $3/bbl), You guarantee $65 - $3 = $62 if Brent is < $65/bbl, will get net of PRICE - $3 up to $72 (when Brent> =$65), $69/bbl for Brent up to $80/bbl, and for Brent> $80 you receive PRICE - $8 -$3 = PRICE - $11.
No hindsight is required... Yes, it is not free, but insurance always has a cost... So, the question is are you comfortble spending $3M now to hedge 1MMbbls of October 2022 production, and stop part of the assuming as Pelle writes, or find yourself selling those barrels at a price of $50/bbl if oil price tanks to that level."
I suppose the above is just an example you've provided to illustrate how collars could work. In reality if an oil company is taking out 3 way collars it is a combination of Bought put, Sold call (Floor and Ceiling) and finally a sold put at a lower strike price than the bought put. Two way collars are the easiest, but to get to a costless collar, which is what Enq does, the strike price spread between the Bought Put and Sold Call will be tight - say no more than 10 dollars - more likely 7 or 8 dollars. In a rising pricing environment over 2 months or so, this can create hedging losses if the oil price overshoots the Ceiling.
In order to stretch this spread out and create a higher ceiling price (say 65 floor and 80 ceiling), we can sell the call at a higher strike price, but we'd receive lower premium than we pay for buying the Put. In order to get to a costless collar situation, Enquest needs to sell a Put at a lower strike price, say $50 or 55. Now, as long as oil prices don't break this lower price level (Sold Put) to the downside, you can just pocket the premium and have this costless collar with a much wider floor and ceiling. I don't think we do 3-way collars and work with a tighter strike price range. This can hurt us if oil really takes off, but I don;t see this happening in 2021 TBH. Way too much Covid uncertainty in the global economy still.
If Enquest can spare $3/$4 or so a barrel, we can then just buy a straight put to protect downside and forget about selling calls. That is a good way of protecting oil revenues to the downside and retain all upside. They could hedge maybe half of their hedge volumes this way. Fingers crossed.
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