Post by
Shaleguy on Oct 05, 2021 10:49am
Hedging Strategies
MHP always gets my juices going in a good way. First the basics. Hedges are serious business and involve real money paid to one party or the counterparty. The reason we do them obviously is to mitigate price volatility to ensure a predictable cashflow. There are a number of hedging instruments including swaps, costless collars which is a swap over a small price range, three way swaps and puts and calls. My preference was a fixed to floating swap. Three way swaps and puts and calls in my opinion are outright gambling. In lay terms there are three philosophies on hedging. The first is no hedging. I worked for a subsidiary of Group Brussels Lambert who controlled Total and Bank Paribas. There idea was we are in the oil business to catch the peaks. Harold Hamm went unhedged in 2015 but hey what's a billion or two The second philosophy is hedge based on fundamentals such as drilling rates, OPEC, storage, world demand, futures and an assessment of the probability is where prices are headed. Under this philosophy you would hedge when you think prices are at or near the peak. In my opinion only I believe the LNG market is being manipulated and Russia is playing hardball. In the US the gas guys can ramp up quickly and I am surprised we haven't seen more rigs deployed. As far as oil is concerned, the three dollar a gallon threshold will spark outrage in the US. Biden has asked OPEC for more oil. But demand will drop at 80 dollars but could peak above a hundred for a short time. As honey pointed out we already see backwardation. Soooo, if I were running Arc I would be thinking of hedging soon The third approach is the bankers approach which is what VII and Arc have done. In this approach you hedge so much each quarter without regard to fundamentals. The benefit is you are protected from black swans but in essence all you do is average out cashflow. What I can't understand is why VII made their 2021 hedges. Even the most dimwitted individual could have predicted the advent of the vaccines. One other point. To protect your condy price you hedge WTI. This called a dirty hedge Hope this helps y'all.