Analyzing ConocoPhillips’s Hedging Effectiveness

According to ConocoPhillips’s (COP) Form 10Q for 2Q16, COP reported total noncash and cash loss of -$163 million on its commodity derivative instruments. When divided by the company’s E&P (exploration and production) revenues of ~$3.7 billion, there’s a hedging effectiveness of -4%.

In other words, in 2Q16, losses on hedging activities caused ConocoPhillips’s E&P revenues to fall 4%.

Almost all upstream companies are involved in hedging, but their hedging effectiveness varies due to derivative coverage, hedge types, and hedge prices. Upstream companies such as Devon Energy (DVN), Range Resources (RRC), and Memorial Resource Development (MRD) have derivative coverages of ~32%, ~80%, and ~100%, respectively, of their forecast crude oil production for 2016.