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A Look at Marathon Oil’s Hedging Strategies

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Marathon Oil’s hedging advantage

In 2Q16, crude oil hedging activities increased Marathon Oil’s (MRO) North America E&P (exploration and production) average realized crude oil price by $0.12 per barrel. As we discussed in Part 7 of this series, excluding hedges, the 2Q16 average realized price for MRO’s North America E&P crude oil production was $40.77 per barrel. This means that the company’s commodity hedging activities increased its North America E&P average realized crude oil price by 0.29%.

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Marathon Oil’s 2016 hedges

For 3Q16 and 4Q16, MRO has three-way collars on NYMEX (New York Mercantile Exchange) WTI (West Texas Intermediate) crude oil for 47,000 barrels per day. In its three-way collar strategy, MRO has sold (or short) call options with a strike price of $55.37 and bought (or long) put options with a strike price of $50.23. This strategy also has a third element, wherein MRO has sold (or short) put options with strike price of $40.96.

As of September 12, 2016, at a NYMEX WTI crude oil price of $45.16 per barrel, these variable price hedges should result in realized prices of $50.23 per barrel.

Other collars

For 3Q16 and 4Q16, MRO also has collars on NYMEX WTI crude oil for 10,000 barrels per day. In its collar strategy, MRO has sold (or short) call options with strike price of $50.00 and bought (or long) put options with strike price of $41.55. As of September 12, 2016, at a NYMEX WTI crude oil price of $45.16 per barrel, these collars will result in realized prices of $45.16 per barrel.

Overall, as of June 30, MRO has derivative coverage for ~50% of its forecasted North America E&P crude oil production for 2H16.

Other upstream companies

Other upstream companies including Bonanza Creek Energy (BCEI), EOG Resources (EOG), and Parsley Energy (PE) have also used a three-way collar strategy to hedge their 2016 productions.

Notably, 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.

In the next part, we’ll continue to discuss MRO’s hedging effectiveness.

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