| Abstract | Oil and gas companies and the necessity for hedging is of growing importance in the industry and the proper way to hedge is often debated. When building a hedge book, many upstream companies view hedging from an isolated viewpoint. Rather than taking a wholistic approach to hedging, exploration and production companies only consider one to two variables, such as the breakeven point of their operations. When developing a hedging plan, a company should consider their capital structure, flexibility of operations, projected production growth, and return based development. This thesis begins with an introduction to hedging and the different instruments utilized by upstream oil and gas companies. Current industry practices are discussed: how much of a producer's production is hedged, what commodity price the companies are hedged at, and what types of positions are used to hedge. Why an upstream company wants to hedge is debated, followed by the different hedging tactics used over different time horizons of oil and gas company production profiles. The four variables of (1) capital structure, (2) flexible operations, (3) production growth, and (4) return based development, and their interrelationships to hedging are discussed. Data supporting why these variables are critical for oil and gas companies to consider is then summarized. A peer group of oil and gas companies was constructed. All data used to analyze the peer group originates from public filings and press releases. Concluding thoughts relate to the current oil and gas commodity environment and how hedging (or the lack of it) is impacting the future of the upstream industry. |
