Chart in Focus: Marathon Oil’s Hedging Effectiveness

According to Marathon Oil’s (MRO) 10-Q filing for 3Q16, MRO reported a total (non-cash and cash) gain of ~$42 million on its derivative instruments. When divided by Marathon Oil’s oil and gas revenues of ~$971 million, this results in hedging effectiveness of ~4%.

In other words, gains on hedging activities in 3Q16 caused Marathon Oil’s oil and gas revenues to increase ~4%. This is much better than in 2Q16, when Marathon Oil reported hedging effectiveness of about -9%.

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