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How Will Marathon Oil Benefit from Its Hedging Activities?

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Marathon Oil’s hedging advantage

In 4Q16, crude oil hedging activities increased Marathon Oil’s (MRO) North American E&P (exploration and production) average realized crude oil price by $0.32 per barrel.

As we saw earlier in this series, excluding hedges, the 4Q16 average realized price for MRO’s North American E&P crude oil production was $45.89 per barrel, meaning that commodity hedging activities increased MRO’s North American E&P average realized crude oil price by 0.70%.

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1Q17 hedges: Three-way collar

In 1Q17, Marathon Oil has had a three-way collars on NYMEX WTI (West Texas Intermediate) crude oil for 50,000 barrels per day. In its three-way collar strategy, MRO has sold (or shorted) call options at a strike price of $58.42 and bought (or longed) put options at a strike price of $50.30.

This strategy also has a third element, wherein MRO sold its put options at a strike price of $43.50. On April 13, 2017, for the NYMEX WTI crude oil price of $53.18 per barrel, these variable price hedges resulted in a realized price of $53.18 per barrel each.

Short-call option

Apart from the above-mentioned hedges, in 4Q16, Marathon Oil also sold call options at a strike price of $61.91 on NYMEX WTI crude oil for 35,000 barrels per day.

On December 31, 2016, MRO had derivative coverage for ~74% of its forecast North American E&P crude oil production for 1Q17.

Other upstream companies

Other upstream companies such as EOG Resources (EOG) and Parsley Energy (PE) have also used the three-way collar strategy to hedge their 1Q17 productions. 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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