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Analyzing Encana’s Hedging Effectiveness

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Encana’s hedging effectiveness

According to Encana’s (ECA) interim financial report for 4Q16, the company reported a total (non-cash and cash) loss of ~$164 million on its commodity derivative instruments. When divided by Encana’s product revenues of ~$705 million, this results in hedging effectiveness of about -23%.

In 4Q16, losses on hedging activities caused Encana’s product revenues to fall ~23%. This is much worse than 4Q15 when ECA’s revenues rose ~28% due to profits on its hedging activities.

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Did Encana make a profit on settled hedges in 4Q16?

According to Encana’s (ECA) form 10Q for 4Q16, the company reported a total profit of ~$2 million on its commodity derivative instruments. This profit came from ECA’s crude oil hedges as crude oil (USO) prices settled below the hedge, or floor prices, for 4Q16.

For 4Q16, crude oil hedging activities decreased Encana’s average realized crude oil price by $4.87 per barrel. As we saw in Part 4 of this series, excluding hedges, the 4Q16 average realized price for ECA’s crude oil production was $45.91 per barrel. This means that the commodity hedging activities increased ECA’s average realized crude oil price ~11%.

Oil and gas producers who reported losses on their hedges

Almost all upstream companies are involved in hedging, but their hedging effectiveness varies due to derivative coverage, hedge types, and hedge prices. For 4Q16, upstream companies California Resources (CRC) and Southwestern Energy (SWN) had negative hedging effectiveness of about -11% and -78%, respectively.

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