Occidental Loses Money on Oil Hedge After Huge 2020 Payout

(Bloomberg) -- Oil and gas producer Occidental Petroleum Corp.’s move to hedge its output has been a roller coaster over the past two years. 

Occidental, one of the Permian Basin’s biggest producers, lost an estimated $339 million from its oil and gas hedges this year through Sept. 30, the latest quarterly filing showed. That includes losses not yet realized. Last year, the company made $960 million from its hedges after prices collapsed, according to regulatory filings.

Despite the loss from its hedges, the explorer posted a $791 million profit in the first three quarters of the year due to rising oil and gas prices.  

The company, which typically doesn’t hedge, took the rare step of locking in future output after its decision to acquire Anadarko Petroleum in 2019. It entered into a so-called costless collar structure for 2020 where two different options are sold to fund the purchase of a put option that would allow the holder to sell crude at a pre-determined price. However, Occidental sold additional call options for 2021 to increase the ceiling price, capping its upside if oil prices rose above $74.16 a barrel in 2021. It subsequently also added natural gas hedges using a collar. 

As Brent crude prices surge, the hedge increasingly loses value. The global oil benchmark has been above $74.16 every day since late September and is currently trading near $83 as demand outstrips supply across the world. 

Based on futures prices on Sept. 30, Occidental was expected to lose $110 million on its natural gas hedge and $138 million on the crude hedge in the fourth quarter, according to estimates from Danny Adkins, oil and gas markets analyst at BloombergNEF. As of today, those losses have climbed to $300 million on oil and $90 million for natural gas, Adkins said. 

A company representative declined to comment on the hedges.    

Occidental will all but end hedging next year due to the run-up in oil and gas prices, Chief Financial Officer Rob Peterson said on a call with analysts last week.

(Updates with company response in penultimate paragraph.)

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