Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on November 6, 2014
US oil CEO Hamm scraps hedges
Harold Hamm, the chief executive of North Dakota oil producer Continental Resources Inc (CLR.N), has stunned a bearish crude market by scrapping all of the company’s hedges – a bold bet that prices will recover soon after sliding some 25 percent.
In so doing, Hamm, who last month called OPEC a “toothless tiger”, appears to be bracing for a price war with the world’s biggest exporter, Saudi Arabia. The OPEC-leader and other key members of the oil exporter group have so far shown no real sign of moving to cut production to lift prices.
Conventional wisdom among oil analysts is that Saudi Arabia, frustrated by a global supply glut caused by soaring output in the United States, is prepared to let prices fall to squeeze U.S. shale oil producers out of the market.
“We have elected to monetize nearly all of our outstanding oil hedges, allowing us to fully participate in what we anticipate will be an oil price recovery,” Hamm said in a statement on Wednesday when the company posted third-quarter results. Continental will hold a conference call on its quarterly earnings with analysts on Thursday.
The move to sell all crude oil hedge positions from October through 2016 netted the oil company a $433 million one-time gain during the most recent quarter.
“We view the recent downdraft in oil prices as unsustainable given the lack of fundamental change in supply and demand,” Hamm said.
Most energy experts said that when prices began falling in June companies should have been carrying more hedging contracts that lock in high prices and protect them from low ones.
“It’s pretty unusual for a company to monetize all of its hedges. The fact that they’re going basically unhedged on oil suggests that they’re going to take on a bit more risk,” said Leo Mariani, an analyst at RBC Capital Markets.
Since they traded at more than $115 a barrel in mid-June, benchmark Brent crude futures have plunged to levels not seen since October 2010, closing near $83 a barrel on Wednesday.
That rout has punished drillers like Continental, whose shares are down by more than 30 percent over the same period. Many analysts have forecast even lower crude prices.
Hedging offers commodity producers protection from sharp price drops, though it can also limit profits if prices soar. By exiting hedging, Hamm is effectively betting that the steep drop in oil prices is a short-term fluke bound to reverse course.
To be sure, going “naked” without hedges is not unprecedented. Majors such as Chevron Corp (CVX.N) and Exxon Mobil Corp (XOM.N) do little hedging on their own production.
SLOWER SPENDING
Yet in a bit of a strategic hedge, Hamm slashed Continental’s 2015 capital spending budget by $600 million, saying he would not put more drilling rigs in the field while prices are low. Given that, Continental doesn’t expect its production to jump as much as previously forecast next year.
The company now expects a 2015 capital budget of $4.6 billion, down from a previous estimate of $5.2 billion.
Continental, a top producer in North Dakota’s Bakken field, trimmed its output growth estimate for next year, now expecting a 23-29 percent jump from 2014 levels. Hamm had previously forecast a 26-32 percent jump for next year.
It posted third-quarter net income of $533.5 million, or $1.44 per share, compared with $167.5 million, or 45 cents per share, in the year-ago period.
Hamm, who founded the Oklahoma City-based company in 1967, is in the midst of a bitter divorce battle with his wife Sue Ann.
Since Hamm owns about 68 percent of the company, the divorce settlement holds vast implications. During much of August and September, the CEO spent most days in court to attend his divorce trial, which may result in one of the largest divorce judgments in U.S. history.
Philip K. Verleger, president of consultancy PKVerleger LLC and a one-time adviser to President Jimmy Carter, said Continental’s decision on hedging may concern investors.
“My expectation is that Continental’s investors will rue this decision because it changes the firm’s business,” he said. “Hedging provides an assured cash flow. By dropping the hedges the firm is gambling that prices go up. If they go down Continental will go bust.”
Other analysts, however, said the company has a strong balance sheet and can weather the downdraft.
13 Comments on "US oil CEO Hamm scraps hedges"
ghung on Thu, 6th Nov 2014 11:42 am
Hail Mary?
Plantagenet on Thu, 6th Nov 2014 12:32 pm
Harold Hamm is doubling down on frakking. Its going to be interesting….who will reach peak oil first? Will KSA’s conventional oil fields peak before Hamm’s Bakken oil in North Dakota, or will Hamm be pumping long after KSA’s oil production is plummeting.
My bet is on Hamm.
louis wu on Thu, 6th Nov 2014 1:25 pm
Maybe the cash out is payoff money for the divorce settlement or payment for an unfortunate accident(god forbid)for the ex.
shallowsand on Thu, 6th Nov 2014 2:10 pm
Plant: I assume you are just stating your admiration from Harold Hamm. Or do you have more information about KSA reserves than the rest of us?
He did say they are slashing the CAPEX budget even though they netted $433 mil from hedge liquidation. Assume means not going to borrow us much/issue debt.
Interesting given he is bullish for 2015 and 2016.
Northwest Resident on Thu, 6th Nov 2014 2:25 pm
Harold Hamm is putting a brave face on for the energy investors desperately longing for a silver lining in the gathering clouds of plunging oil prices. He needs to keep the faithful in line and fully mesmerized by the illusion. Until he doesn’t need them anymore. Just a guess…
Plantagenet on Thu, 6th Nov 2014 2:32 pm
shallowsand:
If you follow the oil story in KSA, then you know that Aramco has had to redrill Ghawar to get more of the oil from the very top of the reservoir, above the water flooding. Even after the reworking, the water cuts at Ghawar are very high.
Thats not good.
oilystuff on Thu, 6th Nov 2014 3:08 pm
Hedging involves guaranteeing production volumes in return for a fixed price. I take this move as yet another sign of a shale oil industry starting to sweat bullets.
shallowsand on Thu, 6th Nov 2014 3:56 pm
Plant: I know less about KSA oil production than I should. Any resources you have on that topic would be appreciated.
Plantagenet on Thu, 6th Nov 2014 3:59 pm
Best place to start is the book “Twilight in the Desert” by Matt Simmons—-a little dated but still good.
Cheers
rockman on Thu, 6th Nov 2014 6:13 pm
OK: Lets see how the actual numbers stack up against the theories and suppositions.
From the EIA. From June 2013 thru August 2013 US oil production increased from 8,579,000 bopd to 8,648,000 bopd. An increase of 69,000 bopd. Global oil production increased 560,000 bopd during that quarter. Granted that’s a small snapshot but that’s the latest data available.
During that period WTI dropped from a high of $107.95/bbl to a low of $93.61 at the end of August. So a 13.2% price drop during a period of global production increase of 0.8% Brent fell from a high of $115.19/bbl to a low of $99.37/bbl. A decrease of 13.7%
And of course we won’t see current production stats for a while but given the rather small increase in US and global oil production during the summer of 2013 I suspect it hasn’t jumped up too much in the last 12 months. Yet now prices have dropped a total 26.3% (Brent) and 23.4% (WTI) thru Nov 2014.
And back to a fact that some have problem accepting: it doesn’t matter how much ExxonMobil, the KSA or the Rockman wants to sell their oil for. The refiners are not going to pay a penny more for oil then they think they’ll be able to sell their products for at an acceptable profit. The Rockman et al have only two options: sell at the price the refiners require or start shutting their wells in. In 40 years I have not worked with one company that has shut an oil well in for a single day because they didn’t get the price they wanted. But I have seen more than a few jump thru their ass to do whatever they could to increase production in the face of falling prices. CASH FLOW, BABY! LOL.
Since I’ve never worked for the KSA I can’t speak for them. But back in the 80’s as demand declined and oil prices fell the KSA kept cutting production while the other OPEC countries followed the US company model: produce every dang barrel you can. Eventually the KSA gave up and went to the DARK SIDE producing every dang barrel they could. And thus developed the days of $10/bbl.
So my personal interpretation: Yes, the US and the world has increased production in the last 18 months. But that doesn’t seem nearly enough to explain a 25% decrease in oil prices. Gasoline prices have dropped to $2.70/gal in Houston. Has it fallen that low because of the lower price of oil? Hell no! LOL. If Chevron could sell the volume they need to for $4.50/gal they would regardless of how low oil prices fall. They don’t base their retail price on what oil sells for. They base the price on what the consumers are willing to pay. Don’t believe me? OK: every here willing to pay more then the price posted on the pump raise your hand. Hmm… thought so. LOL.
It really isn’t that complex: no one buys gasoline they can’t afford…they can only pay so much. Refiners can’t charge consumers more then what they are willing to pay. So refiners can’t pay more for oil if they can’t sell gasoline at a profit. And the Rockman and the KSA can’t force the refiners to pay so much for the oil they crack if the refiners can’t make a profit selling to consumers. And consumers can’t pay more for gasoline then they can afford.
Some times the simplest explanation is the right one. Not as interesting as conspiracy theories, of course.
Davy on Thu, 6th Nov 2014 6:27 pm
Thanks Rock for sound oil price dynamics.
Nony on Thu, 6th Nov 2014 7:05 pm
The supply side has been the big change, Rock. You can’t just look at a few months. You have to look at the anticipated future production (or lack of it). See the Hotelling rule. Macro side, we did not go through a sudden recession.
coffeeguyzz on Thu, 6th Nov 2014 9:31 pm
Incredibly ballsy move on Hamm’s part. Next few months should be interesting and … educational.
Rockman, good evening. Quick follow up to our Parshall/sweet spot development exchange …
Nov. 4, EOG released an amazingly informative, concise press release that, amongst other things, touched upon Parshall development. My speculation may be correct as to EOG still evaluating data as they claim success with 700 foot spacing between laterals – and contemplating closer yet wellbore placement. In addition, the second and third bench/layer of the underlying Three Forks are showing very positive results.
There is growing plausibility to think that most every 2 sq. mile Drilling Spacing Unit will eventually support 30 or so ADDITIONAL wells above the two or three currently producing. Hard to believe, I realize, but headin’ that way.