Canadian oil and gas companies that hedged their oil production before the global oil price crash will be very relieved they did so. This CanOils study of 45 TSX-listed companies’ Q4 2014 results (see note 1) shows that many Canadian companies made large realized hedging gains as the oil price fell to around $50 by year-end 2014. This study agrees with a recent EIA article, written using Evaluate Energy data, showing the impact of hedging on U.S. companies during the same period.
Whilst hedging may have seemed over-cautious at the start of the year, with oil prices not having wavered from the $90-$100 mark for quite some time, hedging eventually proved to be a prudent strategy given the collapse of commodity prices by almost 50% towards the end of the year.
Hedging contracts (also known as derivative contracts) are a common risk management strategy for oil and gas producers. A producing company will agree with a buyer to sell future production at a certain price, thus potentially limiting revenues if prices climb, but simultaneously shielding the producer from excessive losses should commodity prices suddenly fall.
The chart below shows that the group of 45 TSX-listed companies, as a whole, experienced both sides of the hedging dynamic in 2014.