Oil&GasHedging

Crude Oil Production, North America (BI OILSN)

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Overview > Oil Volume May Accelerate Sooner; Here Come the Hedges >> Exhibit 1 of 12

Oil and Gas Hedging Provides Insurance, Yet Is It Liquid Enough?Analysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015E&Ps in the biggest U.S. shaleplays may lock in oil hedges atprices above $60 a barrel, signalingthey may bring more output tomarket later this year. By sellingoil and natural gas forward, E&Pscan express their outlook for prices,support drilling through reliablecash flow and address balancesheet issues. Concerns remainabout whether there will be enoughparticipants to maintain liquidity.Price swings may be constrainedby unconventional drilling, with itsjust-in-time inventory and resilientoutput.

Key Points (5 of 12):* Hedging to Shadow Crude Oil, Leverage as Volume Mirrors Price* WTI Oil Price Over $60 May Invite Additional Output, Hedging* Oil and Gas Liquidity Shrinks, Volatility Drops to Multiyear Low* WTI Trading Challenges Loom as Market Shifts and Output Rises* Brent Crude Oil Market Remains the Domain of Speculators

Crude Oil Production TeamBloomberg Intelligence




Hedging to Shadow Crude Oil, Leverage as Volume Mirrors PriceAnalysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015E&Ps express a view of thecommodity landscape through theamount of oil sold forward and theprice level contracted. They haveadded hedges in 2015 and will likelysecure more in 2016 if prices stayabove $60 a barrel. This wouldimply that output may jump, whilesuggesting a more constrainedprice band as the new price ismet with higher volume. Hedgingsupports an E&P's drilling programby securing cash flow, balancing itsliquidity profile and leverage with itsoperational goals.





WTI Oil Price Over $60 May Invite Additional Output, HedgingAnalysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015A recovery in oil futures will likelypromote U.S. crude oil output andproducer hedging. Although volumehas declined marginally in 2Q,it remains resilient. Productionclimbed about 1 million barrels to9.37 million since June, even asWTI prices slumped more than50% from their peak. E&Ps suggestdrilling will return with prices above$60 a barrel, implying incrementaloutput gains into 2016. The potentialfor additional volume may mute theprice response.

Crude Oil Production Team For interactive exhibit on Bloomberg, run:Bloomberg Intelligence G BI3 1153<GO>




Clayton Williams, Laredo Add Most Hedges of Permian E&P PeersAnalysts: Gurpal Dosanjh & Vincent G PiazzaMay 15, 2015Clayton Williams has increased2015 oil hedges by 1,500 basispoints as oil prices recovered. Anincrease in the pipeline capacitytaking Permian Basin crude to GulfCoast refineries will help E&Ps inthe area as spreads to benchmarkprices narrow. Laredo beganhedging 2016 output, adding almost52% of estimated production. Not allPermian producers have followed.Service-cost declines for 2016 aren'tyet determined and drilling andcompletion costs may adjust.





Bakken E&Ps Contrast as Oasis Hedges Decline, Whiting's RiseAnalysts: Gurpal Dosanjh & Vincent G PiazzaMay 15, 2015Whiting has increased hedgessince February, likely because of theincrease in the WTI crude oil futuresstrip for 2015 and 2016. Hedgedoil, as a percentage of estimatedoutput, rose more than 1,500 basispoints from Feb. 13 to March 31.Whiting's strategy contrasts withBakken peer Oasis, whose 2015 oilhedges declined, possibly as 1Qhedges rolled off. Continental hasadded slightly to hedges, thoughit has lower leverage than otherBakken E&Ps and may not needto sell as much output forward tosupport drilling.





Rockies-Based E&Ps Add to Already Strong Oil-Hedging PositionsAnalysts: Gurpal Dosanjh & Vincent G PiazzaMay 15, 2015WPX Energy began hedging 2016production as the WTI futuresstrip topped $60 a barrel. Stronghedging by the company and RockyMountain E&P peers Bill Barrett andPDC Energy may indicate that oildrilling is profitable in the region ata WTI price below $60. Hedges forthe three companies are all above70% for the remainder of 2015and average almost 50% for 2016.The increased hedging also offersprotection should local oil pricesand differentials to benchmark WTIdecline.





U.S. Offshore E&Ps Oil Hedging Unchanged Even as Oil Price RisesAnalysts: Gurpal Dosanjh & Vincent G PiazzaMay 15, 2015Energy XXI, W&T Offshore andStone Energy, all E&Ps thatprimarily operate in the Gulf ofMexico, decided not to add to 2016oil hedges, ignoring the price gainduring the past couple months.W&T Offshore has no oil hedges,potentially making the sharesmore volatile as they may mirrorfluctuations in the commodityprice. The lack of new hedges issomewhat surprising, given thatthe three companies are moreleveraged than onshore peers andtheir break-even prices may behigher than onshore shale.





Liquidity, Volatility Affect Ability to Express Oil and Gas ViewAnalysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015Open interest and volume alongthe commodity price curve offerinsight into liquidity and the levelof participation in the futurestrading market. Changes in marginrequirements and concerns aboutregulatory shifts, in conjunction withgreater scrutiny of trading, haveaffected liquidity for counterparties,including commercial hedgersand other intermediaries. A lackof liquidity affects volatility andcan obstruct participants such asE&Ps from expressing their views ofcommodity prices through hedging.

Key Points:* Volatility to Return to Oil Space, or Relative Quiet?* Less Participation May Reduce Liquidity, Make It Tough for E&PHedging of WTI* Brent Remains Speculator's Domain of Choice* Natural Gas Trading Inflection May Be Sustained





Oil and Gas Liquidity Shrinks, Volatility Drops to Multiyear LowAnalysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015WTI crude oil's volatility has fallento multiyear lows, giving marketparticipants fewer opportunities toexpress their views on the directionof prices. Heightened regulatoryscrutiny of commodity tradingmay have deterred traditionalfinancial intermediaries, reducingthe number of participants andshrinking available liquidity along thecommodity price curve. Regulatorychanges and shifts in productmarket share may continue to affectWTI, with less liquidity sometimescorresponding to volatility spikes.

Crude Oil Production Team For interactive exhibit on Bloomberg, run:Bloomberg Intelligence G BI2 4688<GO>




WTI Trading Challenges Loom as Market Shifts and Output RisesAnalysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015The development of alternativetrading venues and products before2008 spurred the emergence ofcommodities trading and fosteredaccess to the market for a largergroup of participants. A pullbackby counterparties, partly due toheightened regulatory scrutinyfollowing the economic crisis, haslikely affected market liquidityand volatility. While WTI front-period open interest has risen, thetotal number of participants hasstagnated. Open interest in thesecond year has retreated, reducingbreadth and depth.





Brent Crude Oil Market Remains the Domain of SpeculatorsAnalysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015Open interest in Brent crude oilfutures has more than tripled since2006, as global oil supply grew onlyabout 12%. Oil speculators mayhave more than doubled since 2010.The WTI market has lost someinfluence in recent years becauseU.S. supply and demand dynamicsno longer represent the broaderglobal undercurrent. Some of thatshare may be recaptured if exportsare allowed. While participants maycontinue to favor Brent, it may notbe more reflective of current trendsgiven the skew toward speculation.





Inflection in U.S. Natural Gas Futures Trading May Be SustainedAnalysts: Vincent G Piazza & Gurpal DosanjhMay 15, 2015A decline in parties tradingnatural gas futures may affect themarket's liquidity, breadth anddepth. Front-year open interesthas risen from recent lows, thoughstill trails levels in 2011 and 2013,when participation was higher.Second-year open interest has alsoincreased, yet remains below 2009peaks. Growth in open interest,coupled with a drop in participation,may suggest trading is concentratedamong a handful of contributors,which could accentuate shifts involatility.


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