Shale Explorers are facing almost $12 billion in losses this year from bad bets on oil after a global rally.Nearly 50 U.S. drillers were surveyed by BNEF, Devon Energy Corp., Pioneer Natural Resources Co., and Diamondback Energy Inc. are on track to rack up the steepest losses, with more than $1 billion in underwater hedges apiece.
It is the sector’s worst hedging performance in records dating back to mid-2017. The group as a whole hedged almost one-third of the estimated 2021 output, and the practical impact is that they are locked in to reap about $5 less than the American benchmark crude, West Texas Intermediate. Oil prices have recovered from pre-Covid levels and are up by almost half this year at about $71 a barrel as the economy returns from lockdowns in 2020.
Nearly 50 companies locked in protections on average at $49.51 a barrel, but some had hedges even lower, including Chesapeake Energy Corp. at $42.64. Unhedged output helped to offset those losses, however, with explorers on average realizing prices at $5.21 a barrel below the average U.S. oil price during the period.
The 30% of output hedged this year is the lowest on record. Nonetheless, many of those same shale producers still posted solid second-quarter results overall. Continental collected $289 million in net income on $1.2 billion in revenue, its best quarterly result since 2018.The losses haven’t been limited to crude drillers. EQT Corp., America’s biggest natural-gas producer, irritated investors last week by boosting hedges at a time when the commodity also is surging. The Shale Explorers booked a $1.3 billion non-cash second-quarter loss on swaps and options contracts.