For those who want to invest in oil stocks, a piece of the puzzle that you cannot ignore is the fact that US producers have differing strategies for hedging oil price movement, potentially limiting both their upside/downside. Despite a record FY2021 of operational cash flow, many of the US oil stocks are sitting on big a pile of unrealized losses due to their hedging. Don't be fooled by management's obfuscation. This is real loss that need to be dealt with at some point.
This hedging could partly explain why, even though when WTI rallied to $80/bbl, oil stocks still languish at 30-60% below their pre-COVID levels (and also because the companies ate away a lot of shareholder's equity to survive COVID).
Even if you're bullish on oil price and want to invest in the oil stocks, you need to look at the way the companies you invested in have their hedging strategies. One of the thing I predicted is that the upstreamers will start diverging in performance come 2022 because of their hedging strategies starting to diverge significantly. Many of them have stated during earning calls that they will no longer hedged at the same level as they did in 2021, thus making their income stream more affected by a rise or fall in oil price.
If you look at the chart in the WSJ link below:
Most of the oil companies on the chart hedged about 50-75% of their total production in 2021, thus severely limiting their upside when oil price rose. Come 2022, some companies have stated that they will no longer hedge most of their production going forward. This could be a blessing or a curse depending on what oil price will be in 2022. One thing is for certain: you can't rest on your laurels just buying any US producers without thinking about their hedging strategies.
Submitted November 30, 2021 at 11:07AM by pml1990 https://ift.tt/3roaYUb
