The O&G producer's question: To hedge or not to hedge?

Wild swings in the oil and natural gas markets in recent years might lead one to expect oil and gas producers regularly use hedging to manage those risks. Not exactly, according to a survey by EnRisk Partners, a Houston energy trading and risk management firm.
Enrisk, which surveyed senior execs from 38 independent oil and gas producers in the U.S., Canada and Australia, found that 29 percent said they never hedge their production, versus the 41 percent of participants that regularly hedge production.
Other findings:

• The majority of the participants which indicated that they hedge on a regular basis stated that, on average, they hedge 51-71% of their current PDP (proved, developed, producing) volumes.

• 36% of the participants stated that their CEO, president or CFO makes their company’s hedging decisions.

• Swaps and collars are the most popular hedging instruments utilized amongst study participants.

• Only 34% of the participants indicated that establishing stable and predictable cash flow is the most important goal of their hedging activities.

• 67% of the study participants said that they would characterize the success of their company’s current and past hedging initiatives as good or excellent.

Oil and natural gas producers have had the ability to hedge their production for many years, since the inception of crude oil and natural gas futures and options, notes EnRisk Partners founder Mike Corley, but it’s not something a company can just do on the fly. (Naturally, EnRisk gets paid to do this kind of thing for companies).
Proposed changes to commodity trading rules might discourage producers from going that route, however.
There are some signs natural gas’ volatility are on a temporary hiatus, reports the WSJ today as producers are looking to sign long-term sales agreements with power plant operators:

Major producers such as Chesapeake Energy Corp. and Devon Energy Corp. are trying to reach multiyear deals–likely five or 10 years long–that would guarantee them buyers for their gas but would deny them the benefits from any sudden price increases.
For a decade, energy companies have shunned such agreements because they wanted to profit when gas prices soared, as they often did, especially in advance of rising winter demand for gas heat.
But huge new gas fields in Texas, Louisiana, Pennsylvania and elsewhere have led to a surge in U.S. natural-gas production, glutting the market even as the recession has sapped demand for all forms of energy. Prices have plummeted to less than $6 per million British thermal units, less than half their price in July 2008.
“The days of double-digit gas prices in the U.S. are over,” said Chesapeake Chairman and Chief Executive Aubrey McClendon.