Pioneer alters hedging strategy to protect against cheap oil

HOUSTON — Irving-based producer Pioneer Natural Resources is changing its hedging strategy to further protect itself from declining oil prices.

The company is converting 85 percent of its 2015 derivatives contracts to fixed-price swaps that cover oil production at an average of $71.18 per barrel.

Those will mostly replace 2015 hedges structured through a different type of derivative known as a “three-way collar” that guarantees sales within a particular range — as long as oil prices don’t fall below a particular floor.

On Wednesday morning, U.S. benchmark oil was trading at $48.04 per barrel.

“In light of the weak oil price environment forecasted for 2015, we elected to convert most of our 2015 oil derivatives from three-way collars to fixed-price swaps to establish a firm oil price floor and lock in the corresponding cash flow,” Pioneer chairman and CEO Scott Sheffield said in a statement.

Three way collars essentially allow oil producers to ensure they’ll get paid prices within a certain range for their product as long as prices don’t fall below a specific floor. Producers who use them often aren’t concerned about rapidly declining commodity prices.

Sometimes, that strategy can make sense, but “it’s less than an ideal strategy” when prices are falling rapidly, writes Mercatus Energy Advisors, in an analysis of the technique.

A fixed-price swap, on the other hand, guarantees a certain level of payment for a commodity. But it limits the ability of a company to benefit if prices rise.