U.S. shale oil producers sink as hedging losses dent earnings

August 1, 2018, by David Gaffen and Sinead Carew

(Reuters) – Shares of U.S. shale oil producers dropped on Wednesday after several companies posted lower-than-expected quarterly profit due to hedging losses and pipeline bottlenecks that kept them from fully benefiting from higher crude prices.

Devon Energy Corp shares were down 5.4 percent and Anadarko Petroleum Corp lost 7.2 percent after both reported earnings per share below analyst expectations.

U.S. shale production has surged in the last two years, buoying overall U.S. oil output to a record of about 11 million barrels per day.

But the average price for some companies’ oil sales has fallen short of expectations, weighing on profits even as U.S. crude futures rose to more than $70 a barrel in the second quarter, the highest level since 2014.

That shortfall for U.S. producers is due in part to heavy discounts on crude coming out of West Texas, where full pipelines and other bottlenecks have made it more difficult to get oil to market and forced companies to accept a lower price.

“There’s not enough pipelines to get the crude to refiners and the end market. They have to take a discount for the bottlenecks,” said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.

Anadarko said it lost $298 million in pre-tax income due to commodity-related hedges. Devon’s losses were related to both commodity derivatives sales and foreign exchange losses.

Pioneer Natural Resources Co, a prominent shale producer, said late on Tuesday in an 8-K regulatory filing that its average price for oil sales, including the cost of hedging production, was $52.62 a barrel.

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Analysts at Robert W. Baird on Tuesday said they had forecast an average of $56.49 a barrel, adding that Pioneer’s disclosure “got the ‘bad news’ out of the way.”

Shares in Pioneer, which reports quarterly results next week, fell 1.7 percent.

Shares of Whiting Petroleum Corp, which operates primarily in North Dakota, slumped 10 percent on Wednesday after reporting results on Tuesday that included a $103 million hit from derivatives costs. Crude oil hedges had a net negative effect of $6.92 per barrel, the company said.

Chesapeake Energy shares tumbled more than 8 percent after the company said lower-than-expected natural gas prices hurt results in the most recent quarter.

The SPDRs Energy Select Sector exchange-traded fund was down 1.7 percent, trailing the overall market.

The S&P 500 energy sector index is posting a 123 percent increase in earnings from last year, but has had the fewest positive surprises among the benchmark’s 11 major sectors in the second quarter.

Just 45 percent of energy companies are beating per-share estimates, compared with an 81 percent beat rate for the S&P 500, according to Thomson Reuters data.

Reporting By David Gaffen and Gary McWilliams; Editing by Jonathan Oatis and Meredith Mazzilli