RE: Report P4827 Apr 2020 18:33
Hi Dumbly, interesting comments. While I don’t know the answers to your questions, I do have a ‘working assumption’ I’d like to share.
The 4MM bbls hedged is the 2.9MM bbls hedged @ $65 over Q1 and the 1.1MM bbls hedged @ $52 over 2020. Based on more detailed hedging patterns provided by other companies I’d expect the 1.1 MM bbl to be spread evenly over the full year, so c0.8MM bbls @ $52 remaining at the end of Q1. The 1.1MM bbls hedge was initiated in accordance with the terms of the OZ loan – it covers approx. 50% of the 15% Kraken production ringfenced to the loan. But important to note that the hedge is not tied specifically to Kraken production volumes or pricing.
Through Q1 ENQ would have been delivering their production, with Dated Brent pricing, independent of the 2.9MM bbl hedging programme. We know that Kraken has historically been sold at a premium to Brent and AB indicated that a premium still exists in today’s market. In early March the oil market was hit by the OPEC disagreement and the emergence of the CV 19.
At the results update and Q&A (9th April) we learnt that ENQ has hedged their Dated Brent priced deliveries in Q2 using futures contracts. (Yes hedging, but not as we know it Jim!)
This form of 'hedging' was not declared by ENQ formally in their statement but revealed in answer to a specific question on price differentials on physical and paper barrels. The detail of the ensuing discussion may be clear to someone familiar with the interaction between Dated Brent and Futures – it was lost on me – but I remember thinking that alongside a level of commercial sensitivity, AB may have felt exposed WRT their timing. In the week or two preceding the meeting oil prices had seen a bit of a bounce based on Trumps interventions.
I agree with romaron’s comment on the complexity of production sales, particularly in the current contango market. I wouldn’t rate ENQ skill set in trading, but the situation appears to have forced their hand into playing the game.
On 1st April there was a timely discussion on this board about the merits or otherwise of playing the oil price through ETFs. At the time a large number of retail investors were investing in USO, the leading ETF in the sector, covering short-dated WTI Futures. This money flow increases the AUM which, due to the terms on the ETF, is directed on the long side into more short-dated contracts, at a time when storage issues were putting pressure at the front end. USO responded by modifying their terms to allow investment further out but the level of contract purchases were raising regulatory concerns. To be continued.
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