uploads///XOG Q GOU Hedges

What Is Extraction Oil & Gas’s Hedging Strategy?

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Dec. 8 2016, Updated 9:36 a.m. ET

Extraction Oil & Gas’s hedging advantage

Extraction Oil & Gas (XOG) uses a variety of derivative instruments to manage fluctuations in crude oil and natural gas prices. XOG has in place a series of collars, fixed price swaps, and basis swaps on a portion of its expected crude oil and natural gas production.

For 3Q16, Extraction Oil & Gas recognized a net gain on commodity derivatives of $16.2 million. In this article, we’ll take a look at its existing crude oil hedges.

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Crude oil hedges for 4Q16

For 4Q16, Extraction Oil & Gas (XOG) has 525 MBoe (thousand barrels of oil equivalent) of NYMEX WTI (West Texas Intermediate) crude oil hedged with swaps. These swaps have an average swap price of $38.70 per barrel.

Apart from its swaps, Extraction Oil & Gas has 839 MBoe of NYMEX WTI crude oil hedged with a collar strategy. In its collar strategy, XOG has sold—or shorted—call options with a strike price of $55.15 and bought—or went long on—put options with a strike price of $50.29.

In December 2016, WTI has overall derivative coverage for ~63% of forecasted crude oil production for 4Q16.

Crude oil hedges for 2017

For 2017, Extraction Oil & Gas has ~1,500 MBbls (thousand barrels) of NYMEX WTI crude oil hedged with swaps with an average swap price of $43.84 per barrel.

For 2017, XOG also has collars on ~6,650 MBbls of WTI crude oil. In its collar strategy, XOG’s hedged volume has average floor and ceiling prices of $47.68 per barrel and $55.88 per barrel, respectively.

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Natural gas hedges for 2017

For 2017, Extraction Oil & Gas has ~25,420,000 MMBtu (million British thermal units) of natural gas hedged with swaps that have an average swap price of $3.06 per MMBtu. XOG does not hedge its natural gas liquids production, which comprises a relatively lower portion of its production mix and revenue mix.

Other upstream companies

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