Shale giants dump oil hedges as losses spiral toward $42 billion

(Bloomberg) — U.S. shale giants stung by billions of dollars in hedging losses are spending big bucks to ditch their positions in a risky bet that prices stay high.

Companies including Pioneer Natural Resources Co. and EOG Resources Inc. are poised to post historic profits when they report earnings this week. But those windfall earnings would be even higher if it weren’t for massive accounting losses from hedges that protect against falling prices while limiting upside potential. Producers in the aggregate are looking at about $42 billion in oil and gas hedging losses through 2023, according to BloombergNEF calculations of data from last year.

While such a hit won’t necessarily affect their balance sheets — instead representing money left on the table — the sheer scale of the miss has companies spending hundreds of millions of dollars to exit their positions. Hess Corp. in March paid $325 million to exit some of its hedges – more than twice what it cost to enter the contracts six months earlier. Pioneer, which reported $2 billion in hedging losses in 2021, spent $328 million to drop its hedges. And EOG, with $2.8 billion in hedging losses in the first-quarter alone, has paid $85 million.

The moves could pay off big. For Pioneer, dropping the hedges could generate more than $1 billion of additional revenue this year, according to energy researcher Enverus. But it’s also risky. If oil prices fall and producers aren't hedged, they could be left with losses in the billions — and those won't be just on paper. That kind of blowback would likely unravel all the hard work companies have put into earning back investor trust over the last couple of years. And it could bring another rollback to oil production at a time when global markets are incredibly tight. 

“My main concern about unwinding hedges is that you had unrealized losses on hedges as prices go higher,” said Matt Marshall, director of market analytics at Aegis Hedging, which advises companies on their hedging strategies. “If you take off those hedges and make them realized losses and then prices come down, then you lose twice.”

Pioneer, which reports first-quarter results Wednesday, declined to comment. EOG, reporting Thursday, didn’t respond to a request for comment. 

Producers can lose money on hedges in a couple of ways. Companies using so-called collars to insure against a downturn will buy put options that allow them to sell their oil at a predetermined price. But to fund those puts, they simultaneously sell bullish call options that pay a premium while capping their exposure to higher prices. Those hedging with swaps can incur losses when prices rise above the fixed levels at which they are sold.