Energy in 2016: The Year of the Hedge (Expiration)

This post is also available on my LinkedIn page.

A Houston Chronicle article from a few days ago is a reminder of what some of us already know but have put in the back of our minds – the hedges and three-way collars put on by savvy oil and gas companies as protection against the current precipitous drop in WTI and Brent pricing globally will soon begin to expire, with virtually none being active as we head into the year 2016. Put simply, this means that anyone selling hydrocarbons will be on the same equally terrible footing. However, those highly levered and whose assets are heavily mortgaged based on boom pricing will really start to feel the pain, as their hedges and collars expire.

What does this mean? First and foremost, industry consolidation will ramp up even more. If the oil services sector is any indication, there will be large-scale M&A; recent activity in that space includes Schlumberger acquiring Cameron, and the merger of Halliburton and Baker Hughes, the latter still being subject to regulatory approval. Times of austerity mean that redundancies will be eliminated. Companies in crowded segments of the industry will have to show their mettle, reducing costs yet improving or at least maintaining efficiencies. Those that cannot play ball will fail, or be folded into those companies who can.

Bankruptcies will increase later this year and into 2016, and assets will still change hands. Those in the land and title portion of the oil and gas industry, such as myself here in the Permian Basin, have not seen as precipitous a decline in work as other portions have (i.e., drilling crews). No matter how assets are acquired (M&A, new lands being drilled via new leases, etc.), the title ultimately still needs to be vetted by highly skilled landmen and attorneys. Unfortunately, other industry sectors face a more difficult battle as the hedges begin to expire.