15 of 20 spent more than the cash they brought in in the 1st quarter according to the WSJ
The price of oil about $70 must be a huge windfall to the US oil frackers, right? Well, apparently it is not that easy.
The WSJ has an interesting article saying the 15 of the 20 top US oil companies managed to spend more than they earned in the first quarter. This according to details from the FactSet data.
The reason for the cash shortfall?
- Bad hedges
- transportation bottlenecks
- Labor and material shortages
Now the companies are doing better than when oil prices were crashing but it is not the gravy train that investors had hoped.
The hedges put on in late 2017 have been particularly painful. According to the article, producers locked in selling prices for future output in the $50-$55 a barrel range. With the price today above $71, that is a big revenue cutter. Ouch.
Of course, when the hedge goes bad, it tempts the companies to take off hedges or not hedge future production. That strategy tends to happen at the worst of times and will only work if the price continues to go higher. However, if the price starts to turn around and fall, while costs remain high or accelerating, that could whip the producers once again. Double ouch.
Below is the chart of the crude oil The $55 was a ceiling area and a level to lean against for hedgers - as long as the price remained below the level.
Instead, the price moved above the ceiling at $55, and the re-test in November should have been the signal to "be careful" (and perhaps lift a hedge until the price moves back below).
The $55 level which was once resistance, became support and the price trended higher. Don't these people look at a chart?
Anyway, of course, if you hedge at $55 I assume you are controlling costs to < $55 too so you make a profit. The produces seemed to not do that and that is hurting their results.
You can read the article HERE (it may be gated)
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