Behind ConocoPhillips’s Hedging Effectiveness



COP’s hedging effectiveness

According to ConocoPhillips’s (COP) form 10Q for 2Q17, COP reported total (non-cash and cash) profits of ~$52 million on its commodity derivative instruments in 2Q17. When divided by ConocoPhillips’s E&P (exploration and production) revenues of ~$4.33 billion, we get a positive hedging effectiveness of 1.2% for COP.

In other words, in 2Q17, profits on hedging activities caused ConocoPhillips’s E&P revenues to rise 1.2%. This is much better than in 2Q16, when COP’s revenue fell ~4.5% due to losses on hedging activities.

In 2Q16, COP reported a total (non-cash and cash) loss of ~$163 million on its commodity derivative instruments, while its E&P revenues came in at ~$3.7 billion.

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Did ConocoPhillips make a profit on settled derivatives in 2Q17?

For 2Q17, settled commodity derivatives increased ConocoPhillips’s total realized price by $2.99 per boe (barrel of oil equivalent). Excluding hedges, the 2Q17 total realized price for COP’s production was $33.09 per boe. This means that the settled commodity derivatives boosted COPs total realized price by ~9%.

In 2Q17, COP’s total realized price, including settled commodity derivatives, rose to $36.08 per boe, up from $27.79 per boe in 2Q16.

Oil and gas peers reporting profits on hedges

Almost all oil and gas producers are involved in hedging activities, but hedging effectiveness varies due to hedge prices, derivative coverage, and hedge types. Upstream peer Southwestern Energy (SWN), for example, has hedging effectiveness of ~20%.

Notably, the First Trust Natural Gas ETF (FCG) invests in natural gas producers, while the Energy Select Sector SPDR ETF (XLE) generally invests at least 95% of its total assets in oil and gas companies.


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