Problem: Some Marcellus/Utica Drillers Entering 2016 Not Hedged
A recent report issued by Standard & Poor’s Ratings Services sounds an alarm over the issue of hedging for 2016–in particular for independent producers in the Marcellus and Utica Shale region. What’s hedging and why do we care? Drillers (and others who buy and sell natural gas) often engage in a practice called hedging, which is, in a simplified explanation, a contract to sell (or buy) a commodity like natural gas at an agreed-on price at a future date. There is an element of risk in hedging. From a driller’s perspective, if you strike an agreement to sell your gas in the future and the price goes a lot higher, you have to sell your gas at the lower price you agreed to. That’s the down side. But if the price goes a lot lower in the future, you’ve covered your derriere by locking in a higher price for the gas you produce–making money when your competitors aren’t. Drillers and others who buy and sell gas use hedging as a way to guard against price swings. It’s a “risk management” function in a company. Unfortunately most of the hedges previously arranged more than a year ago are now expiring. And nobody but nobody is willing to strike a contract right now for $3 or $4/Mcf gas a year or more down the road. No one believes the price will recover that much. Which means many drillers (in our neck of the woods) are entering 2016 without their production being hedged–a very scary proposition…
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Hilcorp Energy, owned by billionaire Jeffery Hildebrand and founded in 1989, is one of the largest privately-held oil and natural gas exploration and production companies in the United States. Hilcorp is the largest oil producer in Louisiana. The company operates along the Gulf Coast of Texas and Louisiana, in Alaska and in the Marcellus/Utica Shale–in eastern Ohio and western Pennsylvania. Hilcorp is an important driller in our neck of the woods. The company is headquartered in Houston, TX and employs over 1,350 employees. Since the company is privately held and no one really knows much about its ownership, most people believe Hildebrand keeps all of the company’s stock for himself. But that doesn’t mean he doesn’t reward his employees. During one of the worst downturns in the industry in a generation (2015), Hildebrand is handing out a $100,000 bonus to each employee this Christmas. Talk about generous! Holy smokes. No wonder Hildebrand’s employees are some of the most loyal and hardworking in the business…