Oil prices, hedging strategies and Guyana’s position

Apr 28, 2020 Editorial

Oil prices keep plummeting amid deepening gloom in the sector, where supply cuts are lagging, shrinking demand by approximately 25% in a continuing catch-up struggle. Though it is bad news for Guyana, there still may be a silver lining that graces the many ominous clouds hanging over this country’s future.
The saving grace rests in the Futures market, where various sophisticated hedging strategies are available for producers and speculators. In this instance, we are focused solely on producers and what they should have done, or actually did, to limit losses due to volatility in the tricky oil markets. Producers-oil companies, farmers, gold companies-take advantage of the protections offered by the Futures market. It makes for sound business sense and characterizes prudent financial management over the core activities of companies.
Apparently, this is what Hess Corporation, which has a 30% investment in the enormous Stabroek Block here in Guyana, did. The article in the Wall Street Journal of April 24 titled, “Some oil producers have secret weapon in hedging” ought to provide some comfort to Guyanese leaders, speculators, industry watchers, and its hopeful citizens. All may not be lost, as there is hope that there could be rising from the ashes.
From the Journal, the word is that “New York-based Hess Corp. says it has hedged about 80% of its oil production, most of it at $55 per barrel for West Texas Intermediate, the main U.S. benchmark. That means the company will make a profit on most of the 200,000 barrels a day it plans to pump this year and will be able to fund its contribution to an 8-billion-barrels Guyana project” along with ExxonMobil and CNOOC. Since Hess shared in a big bet on our oil promise, which confirmations made it the darling of Wall Street, it would have been not only naïve and negligent but most reckless if it did not hedge that investment. Now that stands as a lifeline for Guyana.
This was publicly voiced in the same Journal article, by Hess’s Chief Executive when he said that compliments of its hedging programme, spending cuts and a new loan, “our company is well positioned for this low-price environment,” and that “Our focus is on…protecting our world-class investment opportunity in Guyana.” With some 80% of the company’s production locked in at around “US$55 per barrel” that helps to reinstate some hopes here that went south last week. Though it is not clear how much of Guyana’s production is hedged at that price, it should be sizable.
And though ExxonMobil is silent as to its own hedging activities in the Futures markets (companies usually are, which reference to Mexico should confirm), it would be grossly irresponsible to be found naked in the oil world at this time. To cut a fine point on this, it would be surprising if companies of this stature, and with so much money on the line, do not protect against price risk, as well as political and sovereign risks, which are high here. Whether it did or not, and on what scale, would be slow in forthcoming. But if Hess Corp did engage in protection for its 30% stake, then it is highly likely that some percentage of Exxon’s investment is hedged. Guyana may get “lucky” after all to quote Finance Minister Jordan.
Still, we offer words of caution to maintain balance amidst guarded optimism. Strategies could be as far as three years ahead. They are expensive, which inhibits 100% protections, leading to the usual cost-benefit balancing act, with a slew of intricate considerations weighed. The main objective is this: protect the company and its investment against most downside risk. In the instance of the underlying oil asset, there would be a predetermined price at which the futures contracts would be sold. To maintain protective hedges, the contracts would be, in the parlance of the trade, “rolled over” prior to expiration towards future periods. An additional strategy would be to buy puts to set a floor on any downside exposure.
With production started and projections aimed at 220,000 barrels per day by 2022 by Hess, Guyana could still salvage something out of the recent price massacres, which look likely to continue, barring a war somewhere.

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Oil prices, hedging strategies and Guyana’s position

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