How Marathon Oil Could Benefit from Hedging Activities in 3Q17
Marathon Oil’s 3Q17 hedges
In order to protect its future cash flows, Marathon Oil (MRO) is using three-way collars and short call option strategies as part of its hedging program. In this part of the series, we’ll study MRO’s 3Q17 hedges and how it will benefit from them.
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MRO’s three-way collar strategy
For 2Q17, Marathon Oil has three-way collars on NYMEX1 WTI (West Texas Intermediate) crude oil (USO) for 50,000 barrels per day. In its three-way collar strategy, MRO has sold (or short) call options with a strike price of $60.37 and bought (or long) put options with a strike price of $54.80. That strategy also has a third element in which MRO sold (or shorted) put options with a strike price of $47.80. As of September 26, 2017, for the NYMEX WTI crude oil price of $51.88 per barrel, MRO’s three-way collar hedges will result in a crude oil realized price of $54.80 per barrel.
MRO’s short call option strategy
Apart from the three-way collars, for 3Q17, Marathon Oil also sold call options with a strike price of $61.91 for NYMEX WTI crude oil for 35,000 barrels per day.
Overall, as of June 30, 2017, MRO has a derivative coverage for ~68.0% of the forecast North America E&P (exploration and production) crude oil production for 3Q17.
Other upstream companies
Other upstream companies, including EOG Resources (EOG) and Pioneer Natural Resources (PXD), have also used three-way collar strategies to hedge their 2Q17 production. For 3Q17, MRO’s peer Murphy Oil (MUR) has fixed price swaps on NYMEX WTI for 22,000 barrels per day at the weighted average price of $50.41 per barrel.
- New York Mercantile Exchange ↩