Newfield: How Disciplined Hedging Propped Cash Flows
Hedging coverage to large volumes
Newfield Corporation (NFX) bolstered its cash flows from operations with the help of aggressive hedging and stayed strong in a period of commodity price turmoil. Approximately 87% of the remaining stocks of oil and gas in 2015, excluding liquids, are protected from price volatility using derivative contracts.
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Most peers paid little attention to hedging
Many energy producers who were myopic to the fall in commodity prices did not seem to pay a lot of attention to their hedging portfolio. They had very small portions to none of their production hedged until 2Q15. Apache Corporation (APA) unwound its hedging position in late 2014, and its cash flows took a severe beating.
Hedging portfolio of Newfield
The company has protected half of its 2016 and a quarter of its 2017 production volumes of oil and gas using swaps and short puts. These hedging strategies lock in the price of a commodity in such a price range that Newfield’s gets ~$19 per barrel more on each barrel it otherwise would have earned.
The slump in cash flows in 1Q15 is due to a $400 million investment made by the management to complete the inventory of wells. Natural gas (UNG) hedging was lucrative in terms of cash flows for Newfield, helping the company drill Oklahoma fields without any borrowing. Newfield’s total derivative portfolio is valued at $700 million.
Peers’ hedging strategies
Bonanza Creek Energy (BCEI), a small-cap peer of Newfield, has hedged 60% of volumes of 2015 using swaps. This approximately results in $10 per barrel more than the market price after hedge. Consol Energy (CNX) has been struggling lately as both coal and natural gas businesses are down. It has hedged 57% of its total volume in 2015 and 47% in 2016 using swaps and options.
A swap is an agreement where the hedger receives the difference between a variable rate and a pre-agreed rate of a commodity if the variable price is higher on the settlement date of a contract. On the other hand, the hedger will have to pay to the counterparty if the floating rate is higher than the fixed one. No commodities are actually exchanged during the period.