Oil Price and Hedges30 Oct 2020 11:33
The price of oil HAS to rise by YE20 or 21Q1.
Oil and gas producers generally have a breakeven of c. $45-50+/barrel when accounting CAPEX, OPEX, G&A etc.
Shale gas producers have breakeven of $55+/barrel.
This year, these producers have been able weather the storm by lowering their breakeven point by cutting costs (CAPEX, OPEX, G&A, etc) in the current environment where they have had $55-70/barrel hedges in place from Y19.
E.g. Tullow had 60% hedged at $57/barrel for 2020.
These high floor hedges run out YE20 for majority of companies.
Any hedges bought by producers since the oil price crash in March (for both Y20 and Y21) have mostly been <$50/barrel.
For example, Tullow increased hedges for Y21 to 48% from 30-40%. Tullow bought these hedges with a floor price of approx. $47/barrel in July (when Brent was c. $43-44/barrel).
For Y21, Tullow is again one of the best hedged small oil player with 48% production hedged at floor price of c. $51.
Many other players do not currently (or have not informed to) have Y21 hedges and if oil price doesn't rise in Y21, most of them will be producing negative cash flows, which is never a good thing for producers that have high debt in low price environment.
So oil price will naturally rise as companies are unable to cover their costs.
Yeah everyone probably knows this in terms of supply vs demand, but yeah, just thought i'd emphasize the point that Tullow is in a good position in a low oil price environment going forward into Y21.
Afterall, as it stands, media and articles are only looking at demand and consumption of oil and gas, rather than the lack of investment and supply.
GLA. DYOR.
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