RE: FUNDING20 Apr 2020 04:49
IMHO the main failing of the company has been not to put an oil hedging program in place. 2 crucial facts were known for some time: (1) the global economy was beginning to show weakness as early as mid-2019. The decade long period of expansion was likely to fizzle out in the foreseeable future. (2) ME governments required oil prices at US$60 or higher to balance their budgets. The consequence of (1) would be lower oil prices on declining demand and of (2) solvency issues of your one and only captive customer. A 1-year forward hedge on annual base production level would have afforded GKP hedging gains well in excess of US$100mn and put the company in an excellent position now.
Some of you may question, what about hedging losses in case of higher oil prices? Fair enough. Hedges are level and outlook dependent, but arguably last year both the level and outlook were very much in favor of putting on a hedge. The goal of a company should be to deliver stable profit margins and hedging is crucial in ensuring precisely that. If you want GKP to be a glorified and leveraged oil price derivative contract you are better off punting oil futures. And in a way it has become precisely that - to all shareholders' detriment in this crisis.