The Hedge Bomb - Why Hedging Will Not Save Shale Oil

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Includes: BBEPQ, CXO, EPE, HK, HPR, LNGG, LRE, MRD, SD
by: Pedro de Almeida

Summary

Shale oil hedges have just died - but they didn't go to heaven, they turned into dangerous zombies.

The good side of this is that from now on, shale E&P companies will have to face real, present prices when selling their oil (and gas) production.

The bad side is that if oil (and gas) prices recover while the hedges still exist, they will drag down the hedged companies.

What are hedges, for shale oil companies?

For a producer (and seller) of a commodity, hedging is a relatively simple idea. You have a company. Let's say, a company that extracts oil from shale formations, and then sells it. At a given time, the selling price for your product (crude oil, mainly) is around $100, and you think that is a fair price - you hope your company will prosper selling at that price. No, strike that, you know your company will prosper (see Note 1, in the end of the article).

That is great, there is only one small detail nagging your trust, a slight catch that may ruin that shining future. You know that the selling price for your product in a year's time (or two years' time?) is highly uncertain; it can be higher or lower - perhaps a lot lower. Naturally, if the selling price of your product goes up, that is great for you. But what if it goes down? In order to keep your company's operations running, you will be forced to keep selling your production, even if you can only sell it at a loss. So, if you can negotiate a fixing of the future selling price of your product at a still OK price, you will do it - as much of it as you can.

Naturally, negotiating and contracting a nice future price involves having some entity in the opposing side, and it will have costs - either a direct cash price, paid at the moment of the price fixing (e.g., if you simply buy put options for your product), or the assumption of a risk (e.g., if you promise to sacrifice the gains in case of a price increase, to balance the coverage of the potential loss resulting from a price decrease).

As always, the devil is in the details. To hedge your future production, or at least a part of it, you will have to make a number of choices. You will need to choose your hedging instruments (e.g., swaps, forwards, futures, options) and counterparts (e.g., a specific trustworthy bank for swaps or forwards; the open market for futures or options). You will need to decide the portion of your production that you want to hedge and the time frames for that hedging. You will have to decide what price you want to guarantee, and how much you are willing to spend, now, to guarantee that price. You will have to decide how to use your financial instruments (e.g. with options, you can simply buy puts, but you can also use collars, selling higher priced calls to recover some of the cost of buying puts, or you can be really smart and use three-way-collars [see Note 2]).

So, let's face it: Hedging becomes complex. Different company directors, with different perspectives on price evolution, different company cost structures, different cash on hand to spend on hedging, will adopt different solutions. It is an interesting and perhaps even fascinating issue. I've dealt with it in the past, consulting on fuel hedging for an air transport company (an airline that was later absorbed in a merger) (see Note 3), and I always found it to be more of an art than a science. However, discussing these details is not the objective of this article. The objective, here, is to explain an extremely serious issue that affects the shale oil (and gas) E&P companies, and that has been missed by almost everyone, with almost certain dire consequences for the investors in these companies.

But most shale oil companies are protected by some really nice hedges, right?

Well, that is indeed the general perception, of investors, analysts and commenters everywhere. The almost unanimous idea is that most shale E&P companies are indeed hedged, and so at least for some more time (some quarters, one or two more years) will be able to keep selling at least part of their production at previously fixed prices - well above the present oil (and gas) prices (see Note 4).

Obviously (the conventional wisdom goes), some specific shale companies did not enter proper hedges in any realistic scale. Examples of those "under-hedged" shale E&P companies include Comstock Resources (NYSE:CRK), Clayton Williams Energy (NASDAQ:CWEI), Swift Energy (SFY), or PetroQuest Energy (NYSE:PQ) and Occidental Petroleum (NYSE:OXY) (see Note 5). Besides, some other companies had good hedges, but have closed them - either out of cash-strapping desperation (e.g., American Eagle Energy (OTC:AMZG)), or just out of mistiming (e.g., Continental Resources (NYSE:CLR) closed them too early).

Naturally, those poor un-hedged things now have to go on selling their production at present-day, depressed, market prices. But the others, the cunningly-managed shale E&P companies with good hedges (i.e. most of them) have a good buffer for the present depressed prices of oil (and gas)… Or so everyone seems to believe!

Indeed, I don't think that anyone reading this article would need to validate the fact that almost everyone is convinced that the shale E&P companies' hedges are still protecting them, in 2015 and beyond. However, for the sake of completeness, I will reference some articles that prove this belief.

Let's start with this one, a generic article from Reuters, precisely focused on the hedge protection of the shale oil companies. The entire article is based on the mistaken idea that present (first and second quarter of 2015) and future production is still hedged, to a greater or smaller extent, depending on the specific companies at stake. Just to time things exactly, the article came out in January 2015, and it claims that,

OPEC's biggest members are counting down the months until their upstart rivals lose the one thing shielding them from crashing oil prices - hedges.

Thereby clearly situating in 2015 a continued hedge protection of the shale oil companies (and, while the idea is wrong, it may well be that the OPEC members believe in it…).

This one is emblematic of a typical interview with someone termed an expert with a vast media audience - in this case, Frank Curzio. In this interview, dating from March 2015, he states that,

Thanks to these hedges, if you look and if you read into these balance sheets and you listen to these conference calls, they're selling oil at a much higher price than what it's trading at right now. They're using the futures markets to do this. Those hedges are going to come off in the next 6 to 12 months depending on what company.

Naturally, the idea that shale (oil and gas) hedges are made mainly through futures is naïve and reveals that the expert has important limitations on the subject. But the main points are that,

a) that he truly believes that the hedges are (in any mysterious way) connected to selling the production at higher price (the natural uninformed expectation of anyone looking at the subject from a purely logical point of view, without specific knowledge of the workings of these hedges) and

b) that he looks at the hedge positions each company keeps open, and expects them to work effectively until they expire in time (the main mistake of almost everyone, on this issue).

This one, is actually a very good article from Bloomberg, already from April 2015. It mainly covers the extremely import point of the downward revisions in the value of the reserves of the E&P shale companies that already started in the fourth quarter of 2014, and will be absolutely dramatic in 2015 - both in terms of direct credit access for those companies and of investment perception, due to assets disappearing from the balances of the companies (and book value vanishing). However, on hedges, they cite the usual "expert," in this case Kristen Campana, from Bracewell & Giuliani, and she merely parrots the "conventional wisdom" that hedges are still working, and will keep working at least for some more quarters:

All of this means that the squeeze happening now will only get worse as companies' hedges against price declines start to roll off. People are expecting a much bigger rush of restructuring and negotiations in the fall.

Another article, this one coming out in a specialized energy site and dating from January 2015, follows the exact same line (it would be inevitable, I never saw a single article pointing to the true reality on this). This article, in particular, would be enough to prove my point, since it includes this very specific quote from the best known and most cited "expert" of the present, Ed Morse, global head of commodities research at Citigroup:

OPEC should not expect to see any impact on U.S. shale growth in the first half of the year and the impact in the second half is being attenuated significantly by producer hedging.

He could not be clearer than this, describing the effects he believes will be produced by the hedges that the shale companies still keep open. Naturally, since this statement is consensual, universally viewed as undoubtedly correct, it is never placed in doubt in the rest of the article.

To finish this overview of the present overwhelming positive vision on the hedges of shale E&P companies, I could not discriminate against Seeking Alpha, and not reference something from here. This article is a good example of the analysis of single shale company in Seeking Alpha. There is no criticism from me towards the author of this article. We could pick at random any article in Seeking Alpha (or in any other site) analyzing a shale E&P company - almost every author looks into its hedges, and every one of them believes those hedges, when they exist, are still working to protect the selling price of the company's production. In this particular article, which came out in March 2015, the author writes:

2015 Oil Prices Protected With Hedges, Albeit The Protection Weakens Throughout The Year - SandRidge has 10.2 million barrels of oil, or its entire oil production at the high end of guidance, hedged in 2015, and about 4 million barrels of oil hedged in 2016. […] The hedging summary below shows that the hedge protection becomes much weaker in the second half of 2015 […] Based on the above, SandRidge's exposure to the commodity price uncertainty increases significantly in Q3 2015.

Even just the initial quoted sub-title ("2015 Oil Prices Protected With Hedges") is enough to show that the author believes that SandRidge's (NYSE:SD) hedges are still protecting their sales, during 2015.

So, after this short review, and going back to the question in the title of the present section, I will give a short, direct, answer: No, globally, the shale oil E&P companies are no longer protected by hedges, even if most of those companies still declare (and book, as formally "open") many hedge positions, with termination dates in 2015, 2016, or beyond.

The hedges did give very important gains to the hedged shale companies during the price drop - and the WTI dropped from almost $110 at the end of the second quarter of 2014 to around $50 at the end of the fourth quarter. But those gains are already in the past, and have already been booked by the companies.

The hedges, now, or from now on, have basically nothing more to give to the "hedged" companies - except if the oil prices fall further, from the present levels of around $50. But, naturally, they cannot fall another $60, as they fell during the second half of 2014. So, any further potential hedge gains are uncertain and, even in the "best" (see Note 6) scenarios, extremely limited. And, conversely, those hedges will give heavy losses to those same companies, if the price of oil recovers while they remain "unclosed".

The fundamental point, one that basically everyone seems to miss, is that these hedges are in reality fully independent from the effective company production and sales of the "hedged" companies. They are a mere financial investment that behaves in opposition to the basic business results of the companies.

Moreover, by now, the potential positive results of those financial investments have already been accounted for, both in the results and in the balances of the companies, in the fourth quarter of 2014. They are almost dead, and can't present any further significant benefit in 2015 or beyond - but they will present big problems, if the oil prices recover while they are still "undead"...

How can that be? Why won't those hedges work as intended?

I will try to explain this as simply (and shortly) as possible. Basically, there are two forms of declaring, booking, and accounting for the hedge positions. One of them is to classify them as hedges. The other (you guessed it, I'm sure) is to not classify them as hedges…

Now, when they are formally classified as hedges, for accounting purposes, they work as one would expect production hedges to work: they give some extra income when/while the company is selling its production below the prices "fixed" in the hedging contracts. Naturally, in this case, companies that have hedges open (i.e., still alive) during, say, the first half of 2015, will benefit from them, since they are being forced to sell their production well below the normal hedging prices contracted during 2012, 2013 and 2014.

The problem is that establishing those real, proper, hedges is extremely complex (see Note 7), and the final financial results are not really different from establishing the "non-hedge hedges"… It is just that the moment when the benefits are booked by the company is not the same. Proper hedges produce a gain (or a loss) during the continued selling of the production.

On the other hand, the "non-hedge hedges" - let's just call them the correct name of "derivatives," from now on - produce gains (or losses) irrespective of the selling of production. The "derivatives" gains (or losses) are concentrated on the moment of the change of oil prices. The value of those gains (or losses) depends only on the scale and type of the derivative positions that were open and the intensity of the variation of the benchmark prices. It has no relation whatsoever with greater or smaller sales of the company's physical products or even with the effective selling prices the company gets for those physical products. They are a mere financial investment, disconnected from the company's sales. In effect, those "derivative" results would remain exactly the same even if the company just stopped its physical operations.

Due to the complexity involved in establishing real hedging positions for the companies' production, almost all the shale E&P companies gave up establishing proper hedges, and went instead for simple derivative contracts, not formally classified as hedges.

I follow the results (and the reports, etc.) of more than 50 listed shale E&P companies, including all the best known among them, and I have only identified two (two in about 55, yes) with their hedging partially classified as "real" hedging: Atlas Resource Partners (NYSE:ARP), and Energy XXI (EXXI) (see Note 8).

All the other companies that I follow either have no hedges at all, or have simple derivative contracts not formally classified as hedges. In the SEC reports, those companies are clear about this fact, but they don't publicize it in investor presentations.

Simply as an example, let's see what SandRidge Energy (see Note 9), discussed in the previously referenced Seeking Alpha article, as per their last 10-K (the SEC annual report for the year of 2014, available here):

To achieve a more predictable cash flow and to reduce its exposure to adverse fluctuations in the prices of oil and natural gas, the company currently has entered, and may in the future enter, into derivative contracts for a portion of its future oil and natural gas production, including fixed price swaps, collars and basis swaps. The company has not designated and does not plan to designate any of its derivative contracts as hedges for accounting purposes and, as a result, records all derivative contracts on its balance sheet at fair value with changes in the fair value recognized in current period earnings. Accordingly, the company's earnings may fluctuate significantly as a result of changes in the fair value of its derivative contracts.

This is almost as clear as it can be and, besides SD, I could use the reports of virtually any other shale E&P company - they contain the same (or a similar) explanation. The real meaning of this for the investors is that most of the shale E&P companies have booked enormous positive derivatives results in the fourth quarter of 2014, but the effects of their hedges are now (i.e. from the end of 2014 on) already basically finished, and so they are now basically worthless.

But what is the real, practical, impact of this supposed problem?

To better understand the practical effects of this issue, let's use an example. Let's check the evolution of the results of the open "derivatives" for some of the better "hedged" shale E&P companies.

The following table covers the "hedging" results (i.e., the derivative results) and the sales of 8 companies involved in oil and gas shale E&P during the last four quarters. These companies were selected simply because they have greatest relation between derivative results and operational sales in the fourth quarter of 2014 - at least among the companies that I follow. As such, they are among the best to illustrate the issues associated to the "hedge problem" that we are discussing. The companies are BreitBurn Energy Partners (BBEP), Bill Barrett Corp. (BBG), Concho Resources (NYSE:CXO), EP Energy (NYSE:EPE), Halcón Resources (NYSE:HK), Linn Energy (LINE), LRR Energy (NYSE:LRE) and Memorial Resource Development (NASDAQ:MRD) (see Note 10). In the table, the values for the WTI are in U.S. dollars per barrel (see Note 11), the values for the company results are in millions of U.S. dollars.

The 3 companies on the right side of the table produce more natural gas than oil. However, the oil production is still important for them. They are included in this example, because they are representative of the many companies that have a high proportion of natural gas production. Also, although all the companies in the table have some shale-based production, some of them have sizable non-shale (i.e., conventional) production. Including them in the example is also on purpose: Conventional and shale-based oil (and gas) production share the same issues in relation to ongoing selling prices and hedging (see Note 12). In relation to the "gas-heavy" companies in our table, notice that they exhibit the same pattern both in the evolution of sales revenues and hedging results as the "oil-heavy" companies. The most important reason for that to happen is that, as with oil, natural gas has also been falling in price (and this fall can be expected to continue), although the price drop of natural gas has been slower than the price crash of the oil. Anyway, a significant proportion of gas production tends to dilute the impact of the evolution of the oil prices, but the hedging issues discussed in this article are similar for oil and gas.

Now, looking at the values in the table, it seems obvious that the extreme values of the hedges in relation to the revenues, particularly in the 4th quarter of 2014, should by itself provoke some thinking… In a quarter that still had an average price of $72 for the WTI (and the fall in the price of natural gas was even slower), half of the companies in the table (BBG, LRE, BBEP and MRD) made around three times more money on their derivatives than in the sale of all of their production (yes, 3 times more).

How can these extreme hedging results be a normal margin over the operational sales of a single quarter, especially when one considers the still limited fall in the average oil price of the quarter?

Obviously that is impossible. Supposing that they are only producing oil (but considering the natural gas does not change this), if they sold their fourth quarter production at around $72, and if a full 100% of that production was "hedged", that would require receiving from their "hedges" 3x$72 per barrel sold - besides receiving the normal selling price of $72 per physical barrel sold. That would require having their oil production hedged at $280 per barrel! A funny thought right?

Well, obviously that did not happen. What happened was that the companies got earnings (basically proportional to the change in oil price) from the totality of the open derivative positions: Those allegedly covering the sales of fourth quarter of 2014, but also those covering all of 2015, 2016, etc.

The extreme "hedging"/derivative gains of the fourth quarter are the result of adding the gains of all the open derivative positions, purportedly associated to several years of future production, and booking those gains in a single quarter. Now, these "future" gains are already in the past.

Naturally, someone that understands how these "hedging" derivatives work, does not need these hints (or proofs, if one prefers) to verify something that is theoretically clear (and transparently recognized by the companies themselves, if one knows where to look). However, having the table compiled, another hint becomes obvious: Notice the extremely similar average prices of oil in the first and third quarters of 2014, and notice how the "hedging" results are so different between those 2 quarters. Every company had derivative losses in the first quarter, with oil prices averaging $98.32, and every company had strong derivative gains in the third quarter, with oil prices averaging a very slightly higher $98.62.

Obviously, the "hedging"/derivative results are not connected to the prices of the stuff the companies produce and sell. They are connected to the variations of those prices during each quarter.

In this line, notice as every company had negative "hedging" results in the quarters when the prices increased, and positive results when the prices decreased. And notice how those results tend to be proportional to the price changes (see Note 13).

OK, so we have looked into the "theory" (clearly disclaimed in the SEC fillings), and into the past financial facts, and this settles it: The "hedging" results are not real hedging results. They are connected to price changes, not to absolute prices of the companies' products. Still, that is the past. As investors, we also need to have a closer look into the future prospects. That is why I added the last 2 lines to the table.

For the first quarter of 2015, we already know what happened to the WTI prices (and also to the natural gas prices), and the companies' financials will come out during the next month or so. What can we expect? While this is difficult to predict with precision at the level of each specific company, it is quite easy to make global projections. Let's start by the safe assumption that for most companies the volumes of production will not change much during the first quarter of 2015, in relation to the last quarter of 2014. If this is so, the sales revenues will be proportional to the average price of oil in those two quarters. Those average prices were $72.31 for Q4 2014, and $50.59 for Q1 2015 - a reduction of 30%. For liquid-heavy companies, expecting a reduction of operational sales revenues in the same proportion of those averages is even conservative, since the companies don't sell their production at the WTI prices.

Most of them sell it bellow the WTI price (see Note 14). Obviously, if the oil is being sold, say, $10 below the WTI prices, the respective average selling prices for Q4 2014 and Q1 2015 drop to $62.31 and $40.59, meaning a price reduction of 35%. On the other hand, for gas-heavy companies, we need to consider that the natural gas prices, while also falling between these 2 quarters, fell somewhat less than oil. So, the last 3 companies in the table should have a (limited) comparative advantage in the first quarter of 2015.

A similar reasoning may be developed for the derivative results. Assuming that the open derivative position remains in Q1 2015 at the same level as it was in Q4 2014 (see Note 15), the derivative results for Q1 2015 are basically proportional to the derivative results of the Q4 2014, with proportionality based on the changes in prices that occurred in the two quarters: A price drop of $37.72 in Q4 2014, and a price drop of just $5.73 in Q1 2015. This means that the derivative results of the first quarter of 2015 should be in the region of 15% of the derivative results of the fourth quarter of 2014. Naturally, these are overall projections, not company-specific predictions.

For the second quarter of 2015, we still don't know the price variation for the WTI. At time of writing, the WTI is at around $53 to $54 per barrel. If it ended the quarter at the present price, this would result in average of around $50 for the quarter, and in a price increase of around $6 from the beginning to the end of the quarter.
Again expecting the maintenance of the volumes of production, this would result in sales revenues basically identical to those of the first quarter 2015.

The derivative results, however, would be negative, again at around 15% of the absolute values of the fourth quarter of 2014. However, in the table, I used a projection that implies no price change for the WTI during the second quarter of 2015. This would imply a slightly lower average selling price for the physical production of the companies, but would avoid the negative impact of the derivative results (due to absence of WTI price increase).

Naturally, if (instead of rising or remaining stable) the oil prices drop further, that will still generate some "hedging" gains in the quarter. However, very few people would consider a further oil price decrease as good news for the shale oil producers...

These projections show that the expectations for the results of the shale E&P companies in the next few quarters are quite negative and, most of all, it shows that they can't expect to reap significant benefits of the "hedges"/derivatives that they keep open. On the contrary, if the price of oil recovers, the derivatives that remain open will be a considerable drag on the results. In fact, if the price of the WTI recovers significantly before those derivative positions expire, or are prematurely closed, the presently open derivative positions will produce enormous losses to the "hedged" companies!

A good ballpark for those potential losses can be gleamed from the losses in derivatives generated by the relatively small price increases of the first and second quarters of 2014, or simply by inverting the derivative results of the fourth quarter of 2015, corrected in the appropriate proportion in relation to the projected oil price increase.

Conclusion

Given the facts, it is probably true that at present most shale E&P companies should just terminate their derivative positions, since the potential for generating losses (associated to an oil price increase during the time frame of those derivatives) is probably greater that the potential for generating profits (associated to an oil price decrease during the time frame of those derivatives). Moreover, although closing those derivatives would bring no positive results in their statements of operation nor in their balance, it could still bring forward some positive cash flow, since some of these positions, while booked at fair (present) value, were still not fully monetized to that fair value. However, naturally, closing the derivatives unprotects the companies from further price decreases of the oil. Doing it depends on the price expectations of the companies (see Note 15). Also, closing the "hedges" will look bad: While their lack of (present) value can be conveniently ignored by the market at large, their simple and terminal disappearance would inevitably be fully assimilated by the market…

Anyway, if the companies have derivative positions that will only terminate after the end of 2015, I think it would be most advisable to close them now, since (due to the predictable price evolution of oil) the balance of risk/reward is heavily against them.

Notes:

1. It just has to prosper - it's your company, right? You know that in the first years of the shale boom (up to 2014) you have been burning cash. Even selling your production at $100, you have only covered half of your drilling and well completion costs (and let's not get started on the general company costs and on the financing costs - investors, lenders, damn bloodsuckers!). But you believe all that will change in the future. Eventually you will sit and enjoy the unending production of your nice, already drilled and fracked wells. Fortunately for you, the production of shale oil wells has slow decay rates, right? Whatever... Tomorrow's mornings will shine bright. Meanwhile, you drill, drill, drill, and your production keeps increasing, and the value of your properties and reserves raises steadily. (Or, at least, that must be the narrative for the investors and lenders, otherwise… What?)

2. Three-way-collars are really, really, smart. Besides doing a normal collar, you sell some additional puts, at very low, unrealistic prices that will never really happen. That helps to cover the costs of the hedging. Naturally, as in any nice complex market-based trick, being that smart can be bad for you. In practice, with the meltdown of oil prices, the damn three-way-collars have bitten hard the shale companies that betted on them… Happens. For a quick overview of the three-way-collars in shale hedging see 1, 2 and 3. And notice how the article in Seeking Alpha comes first, then the article in the general financial press, then the reaction of the industry…

3. That means I'm again available, for the right price.

4. To simplify, let's ignore natural gas liquids and such. They are rarely hedged, but that is inconsequential, since the price of those middle products tends to evolve with the oil and gas prices, and so hedging a little more of oil and gas will also, effectively, cover any desired proportion of those other products.

5. Although OXY and even PQ are more diversified, with significant non-shale production, and so they are closer to the thinking of the non-shale-focused majors, that usually live without hedges.

6. It seems cruel to classify oil prices even lower than the present $50 as a "best scenario" for the shale oil E&P companies, but that is the case in terms of their hedges… That is the only case in which the hedges would still be somewhat positive, instead of negative or, at best, neutral.

7. I don't think it is worthy to explain those details in this kind of article but, in summary, establishing real hedges implies establishing hedging contracts in relation to a benchmark as the WTI or the Henry Hub gas and, in addition, also requires hedging the difference between the effective selling prices achieved by the company and those benchmarks. All of that needs to be done with care to the effective product mix of the company, the different spreads between each production (different products, different production locations) and its benchmark, etc.

8. Not that these two companies are in good shape. I have small short positions in both of them.

9. I'm also short in SD, but then again I'm short in some 30 shale companies - and also in FRAK (a general unconventional oil and gas ETF), for a more distributed short exposure to the shale bubble.

10. I would like to note that most shale E&P companies had very high derivative results in the fourth quarter of 2014. Besides those listed in this table, many others had derivative results greater that their sales revenues. Those that are listed here are just a sample of the "better hedged" among them.

11. The average prices indicated for each quarter are a simple average of the starting and closing prices of each quarter, not an average the daily WTI spot prices. This simplification doesn't affect the analysis in any meaningful way.

12. The differences between conventional and shale-based ("tight") oil and gas production are more relevant at technical levels than at the level of company financials. Basically, the main advantage of conventional production over shale-based production is that the wells have much slower production decay. Other advantages include reduced well costs (no need of fracking), or the possibility of draining larger reserve volumes with a single well. Shale-based production also presents some advantages over conventional production. Anyway, discussing these issues is beyond the scope of this article.

13. Naturally the proportionality is not perfect, due to a number of factors: For each company, the open derivative positions change from quarter to quarter; the oil and natural gas prices did not evolve exactly on par (and so the overall derivative results cannot be fully proportional to simple crude oil price changes); different derivative mechanisms produce different results over similar price differentials (e.g. three-way-collars don't give additional gains after the price drops below a specific threshold), etc.

14. As an example, consider that the Bakken sweet crude prices averaged only $31.41 per barrel in January!

15. A very optimistic simplification, since for most companies at least a part of those positions terminated in the end of 2014 - and most companies did not open new hedge positions at the present, very depressed, available prices.

16. Predicting the oil prices, to diverse time frames, is an extremely interesting subject (and, in fact, the subject to which I dedicate most of my work) but it is beyond the scope of this article.

In any case, at present, and for the short term (let's say, the next couple of months) after the recent oil price recovery (that I think is simply a strong Mr. Market oscillation, not justified by the fundamentals), I expect a relatively strong correction of the oil prices. For the medium to long term (let's say, the end of 2015 and 2016 and beyond), I expect the that the most expensive forms of crude of extraction (among them, for sure, the U.S. shale oil) will compress a lot, and that world oil production will again become tight in relation to the demand, and that prices will end up recovering to above $100. For an analysis focused in the short to medium term, which I believe remains fully valid, see my previous article on Seeking Alpha. In fact, I believe that the present market oscillation that made the crude prices jump up has created a particularly interesting short-term investment opportunity in the short side, in the WTI and Brent.

Disclosure: The author is short FRAK.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is short in the WTI, FRAK, and several shale E&P companies, both those referenced in this article and others.