Oil Producers Pounce on Price Uptick to Bolster Hedging

British-based oil producers have started to sell more oil and gas forward to lock in a small uptick in prices, as doubts grow that the market will ever return to the days of crude at $100 a barrel after a two-year rout.

North Sea producers such as Ithaca, Tullow Oil (TUWLF) , EnQuest and Premier Oil (PMOIF), whose balance sheets remain under pressure as a halving in oil prices in two years slashed revenues, have beefed up their hedging positions.

In doing so, they pounced on a rebound in oil prices to a one-year high in mid-October and costlier gas in Britain.

"We've increased hedging on our UK gas because the gas price has been quite strong recently and we're doing a bit more of that as we speak," Premier Oil Chief Executive Tony Durrant told Reuters.

British day-ahead gas prices surged more than 20 percent in early November when a cold snap hit, giving producers including Premier Oil the chance to lock in more value for forward sales.

Profitable hedging trades could provide a needed boost for these cash-strapped companies, which have made cost cuts a priority, and protect them against any further price downturns.

Ithaca, set to start operating a new field in the North Sea at the end of the month, made $18.1 million on its commodity hedges in the third quarter, the company said.

It hedged another 1.5 million barrels of its 2017 oil production in mid-October, a time when Brent crude reached a one-year peak of $53.73 a barrel.

The oil and gas producer has now hedged 7,800 barrels of oil per day (bpd) of its year-ahead production at an average price of $52 a barrel, giving the company a solid buffer against any price downside in 2017.

This equates to 87 percent of its 2016 production. A 2017 target has not yet been disclosed.

Tullow also made use of higher prices in the third quarter, topping up its 2016-2019 oil production hedges by a combined 21,740 bpd, nearly double the amount hedged in the same quarter last year for 2015-2018.

The companies, all active in Britain, have also reaped benefits from the drop in the pound, which has fallen to its lowest in over 30 years since the country voted in June to leave the European Union.

A weaker pound means British-based oil producers, which earn revenue in dollars, see their spending in the local currency fall. Premier Oil, for example, has saved more than 250 million pounds ($312 million) thanks to the exchange rate.

The 16 percent drop in the pound against the dollar this year has prompted many producers to hedge their foreign exchange exposure, as well as their oil and gas.

Oil producer EnQuest said it had hedged all of its sterling exposure for 2016 but none for 2017.

"We will see a decline in our cost base in dollar terms and an increase in our margins," EnQuest Chief Executive Amjad Bseisu told Reuters.

"If you have the oil price coming down 70 percent and the pound coming down 20 percent, the oil price going up again has a much bigger impact."

(By Karolin Schaps and Amanda Cooper)