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Taking a Deep Dive into Marathon Oil’s Operational Performance

PART:
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Part 9
Taking a Deep Dive into Marathon Oil’s Operational Performance PART 9 OF 14

How Can Marathon Oil Benefit from Its Hedging Activities?

Marathon Oil’s hedging advantage

For 3Q16, crude oil hedging activities increased Marathon Oil’s (MRO) North America E&P (exploration and production) average realized crude oil price by $1.55 per barrel. As we explored in Part 7 of this series, excluding hedges, the 3Q16 average realized price for MRO’s North America E&P crude oil production was $41.35 per barrel.

This means that the commodity hedging activities increased MRO’s North America E&P average realized crude oil price ~3.7%.

How Can Marathon Oil Benefit from Its Hedging Activities?

How Can Marathon Oil Benefit from Its Hedging Activities?

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4Q16 hedges: Three-way collar

For 4Q16, Marathon Oil has three-way collars on NYMEX WTI (West Texas Intermediate) crude oil for 47,000 barrels per day, respectively. In its three-way collar strategy, MRO has sold (or shorted) call options with a strike price of $55.37, and bought (or went long on) put options with a strike price of $50.23.

This strategy has a third element where MRO sold (or shorted) put options with a strike price of $40.96. On December 13, 2016, for the NYMEX WTI crude oil price of $52.37 per barrel, these variable price hedges could result in realized prices of $52.37 per barrel, respectively.

Collar

For 4Q16, Marathon Oil also has collars on NYMEX WTI crude oil for 10,000 barrels per day. In its collar strategy, MRO has sold (or shorted) call options with strike price of $50.00 and bought (or went long on) put options with a strike price of $41.55.

On December 13, 2016, for the NYMEX WTI crude oil price of $52.37 per barrel, these collars could result in realized prices of $50.00 per barrel, respectively.

Short call option

Apart from the above hedges, for 4Q16, Marathon Oil also sold call options with a strike price of $72.39 on NYMEX WTI crude oil for 10,000 barrels per day.

Overall, on September 30, 2016, MRO has derivative coverage for ~55% of forecasted North America E&P crude oil production for 4Q16.

Other oil and gas companies

Among the other upstream companies, Bonanza Creek Energy (BCEI), EOG Resources (EOG), and Parsley Energy (PE) have also used the 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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