RE:Mexico keeping its annual Oil "hedges" nice and neat Ahh yes the great successful country of Mexico and Pemex,
https://www.bloomberg.com/news/features/2017-04-04/uncovering-the-secret-history-of-wall-street-s-largest-oil-trade
This trade is one of the largest fee generating events on wall street and puts downward pressure on the market for everyone.
I just want to engage on a thought experiment. The futures market is a zero sum game and reasonable efficient. A company that hedges 100% of it's production or 0% will roughly earn the same price over time less fees for origination (that are not immaterial [see basis trades and differences between the credit worthiness of different parties). This is true over a long enough period where prices return to the mean and the market is not in a trend or over a full market cycle. The exception was due to major market/geopolitical dislocation like the Ukraine war, where this created true windfall profits outside of normal cycle movements.
For the argument about insurance or smoothing out flows, lets look at the case where Peyto was unhedged at the start of 2021. Peyto would have earned much higher realized pricing and paid off all it's debt since prices averaged over $6HH USD in 2022, and started 2023 with it's realized pricing where the hedged Peyto is. Now from this point lets say prices went down to $2 HH for the remainder of the year. Unhedged Peyto would have to either cut it's dividend, reduce capex or run up debt. Let's say it did what it historically did and just ran with it and put debt on it's clean balance sheet. It likely would have had to run debt to $200-250M. At the end of 2023, strip pricing is back to where hedged Peyto is at; now let's look at the difference.
If you look at it over this entire cycle, they paid the same amount of dividends...but one company ended up with balance sheet with only $200-250M in debt and saved $50MM in interest which gives a $0.20 EPS return in perpetuity. Whether you hedge or use your balance sheet the result is the same, less interest, origination fees & contract costs. These results would be more exagerated if hedged Peyto kept dividends up and capex flat (like they did); and unhedged Peyto cut dividends during lean times and raised capex during good times.
Futures contracts are zero sum and do not generate value on it's own merit... any value created is due to speculation/market timing the exact thing Peyto claims to not want to do. If that activity is done not to protect capex spending (hedging in proportion to capex needs until the well pays out) but to maintain high debt then it is value destroying.