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Why W&T Offshore Hasn't Rallied despite Higher Energy Prices

PART:
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Part 7
Why W&T Offshore Hasn't Rallied despite Higher Energy Prices PART 7 OF 14

How Will W&T Offshore Benefit from Its Hedging Activities?

W&T Offshore’s hedging advantage

According to W&T Offshore’s (WTI) form 10Q for 3Q16, for the first nine months of 2016, crude oil and natural gas hedging activities resulted in cash receipts of ~$4.8 million. Maximum gains on WTI’s hedges were realized in 1Q16 when crude oil and natural gas prices were trading at decade-low levels.

In other words, for the first nine months of 2016, commodity hedging activities increased WTI’s cash flow by ~$4.8 million. This is a significant benefit considering that WTI’s total cash flow for the first nine months of 2016 was at -$9.2 million. We’ll study WTI’s cash flows in part 12 of this series. Now let’s take a look at WTI’s existing hedges and whether the company will receive any hedging benefit at the current higher crude oil prices.

How Will W&amp;T Offshore Benefit from Its Hedging Activities?

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Crude oil hedges

For 4Q16, WTI has a two-way collar on NYMEX WTI (West Texas Intermediate) crude oil for 5,000 barrels per day. In its collar strategy, WTI has sold call options with a strike price of $40 and bought put options with a strike price of $81.47. As of December 5, 2016, at a NYMEX WTI crude oil price of $51.34 per barrel, these collars will result in realized prices of $51.34 per barrel, which means that WTI will not receive a hedging benefit, as crude oil prices are trading above the floor price.

Overall, as of November 2016, WTI has derivative coverage for ~28% of forecasted crude oil production for 4Q16.

Natural gas hedges

Similarly, as of November 2016, WTI has derivative coverage for ~25% of forecasted natural gas production for 4Q16. W&T Offshore doesn’t hedge its natural gas liquids production, as it constitutes a relatively low portion of its production mix and revenue mix.

Other upstream companies

Other upstream companies like Bonanza Creek Energy (BCEI), EOG Resources (EOG), and Parsley Energy (PE) have used a three-way collar strategy to hedge their 2016 production. The Energy Select Sector SPDR ETF (XLE) generally invests at least 95% of its total assets in oil and gas related equities from the S&P 500.

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