Third-quarter profits to sparkle for shale producers without hedges

SandRidge Energy

26/10/2021 11:00

By Liz Hampton
    Oct 26 (Reuters) - With oil and gas prices at multi-year
highs, U.S. shale producers are poised to deliver the strongest
earnings since the onset of the coronavirus pandemic, so long as
they didn't lock in sales tied to much lower prices. 
    Sky-high oil and gas prices will fill energy companies'
bottom line, rewarding investors who hung on through the
pandemic. U.S. crude averaged roughly $71 a barrel, almost 80%
higher than year-ago levels, and natural gas sold for over $5
per million British Thermal Units (mmBTU), a price not seen
since 2014. 
    The biggest oil and gas producers kick off results this
week, with reports from EQT Corp  EQT.N  and Hess Corp  HES.N . 
 Continental Resources  CLR.N , Pioneer Natural Resources
 PXD.N  and EOG Resources  EOG.N  will report the week after.  
    Pioneer's earnings per share could hit $3.94, up from 17
cents last year, and Continental earnings are estimated at
$1.20, versus a loss of 16 cents a share the same period last
year, according to Refinitiv IBES.
    While commodity prices are an earnings elixir, some
companies face charges to earnings from wrong-way bets due to
hedges, or selling future output at prices below the market
average.    
    EQT Corp, which hedged heavily, is anticipated to report a 5
cents per share loss, from a 15 cents per share loss in the
third quarter of 2020. Pioneer Natural Resources on Monday
warned it would report hedging losses of $501 million for the
quarter, and over $2 billion in losses so far this year.
 urn:newsml:reuters.com:*:nL1N2RL2MU
    "The only thing that is going to be preventing a blowout
quarter is the hedging situation," said Chris Duncan, an equity
research analyst at Brandes Investment Partners, adding that
some 50% of production volumes were hedged for the quarter. 
    Energy tech firm Enverus anticipates some $6 billion in
aggregate pre-tax losses from third quarter commodity hedges
among the 64 North American oil and gas producers it tracks.
Those firms lost some $10.5 billion from derivatives in the
first half of the year, according to Enverus data. 
    Enverus anticipates oil and gas producers to report free
cash flow of $11.9 billion for the quarter, with loss-making
hedge books reducing that value by 32%. 
    (Click here https://graphics.reuters.com/USA-OIL/OIL/jnpwewkjrpw
 for an earnings chart) 
    Shale producer EOG Resources  EOG.N  recently warned it
would report a loss of $494 million on its hedges. EQT Corp
earlier this year said it hedged 80% of this year's output at
below $3 per million British thermal units, well below market
prices. Apache parent APA Corp said it anticipated $37 million
in losses.
    "Overly hedging as some of these producers have done impairs
their ability to be competitive in a rising price environment,"
said Josh Young, chief investment officer at energy investor
Bison Interests.
    Continental Resources, which limits its hedging, last
quarter increased its dividend and resumed a $1 billion share
repurchase program.  
    A spokesperson declined to comment. 
    While shareholders may lament missing out higher prices,
hedges can help keep companies on secure financial footing,
locking in prices to pay for drilling expenses. 
    "Credit investors we have spoken with lately are concerned
that issuers may unwind their hedges," said John Kempf of credit
firm Fitch Ratings. "Creditors do not want to assume price
risk." 

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U.S. shale companies Q3 earnings graphic    https://graphics.reuters.com/USA-OIL/OIL/jnpwewkjrpw/
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 (Reporting by Liz Hampton in Denver; Editing by Lincoln Feast.)
 ((Liz.Hampton@thomsonreuters.com; +1 832 571 8115; Reuters
Messaging: Reuters Messaging: liz.hampton.reuters@reuters.net))