Business | Oil & Gas
Oil hedges turn toxic for weak balance sheets
SemGroup warns lenders it could file for bankruptcy as margin calls to protect business eat into its cash reserves.
- Reuters
- Published: 23:05 July 19, 2008
New York: Companies with weak balance sheets are discovering that hedges against oil price moves can be almost as punishing as this summer's leap in crude costs.
Physical oil trader SemGroup told its lenders this week it may file for bankruptcy after margin calls on hedges designed to protect its 500,000 barrels per day business from a fall in oil prices gobbled up its cash reserves.
SemGroup's publicly traded subsidiary SemGroup Energy Partners disclosed its privately held parent's financial troubles late on Thursday.
Traders are required to post a margin, a percentage of their position in cash, to guarantee they will meet their obligations. When the price of a futures contract rises, traders who are short the contract receive a margin call from the exchange requiring them to post even more cash.
"It's a classic producer squeeze," said John Kilduff, senior vice-president at MF Global in New York. "They have the oil and assets in the ground but they have to make these real-time margin calls."
The high cost of oil and the growing volatility of oil prices have created headaches for a most companies, particularly airlines and freight companies that depend on affordable fuel.
Energy analysts said more liquidity problems are likely to surface in the wake of the torrid rally since April that pushed oil prices up 45 per cent to a record $147.27 a barrel.
Companies facing the biggest threat right now could be those that took short positions on crude, experts said. Independent oil and gas producers, companies like SemGroup that buy and trade oil, and refiners head the list of potential victims and the credit crunch at US banks is making the situation worse.
"With these explosive moves in the commodities a lot of hedgers are exceeding their credit lines and when they go to their banks they can't get any more credit," said Phil Flynn of Alaron Trading in Chicago.
Goldman Sachs warned in a research note this month that tight credit was driving leveraged speculators and oil producers with weak credit out of the oil futures market.
Companies closing out short positions on oil may have fuelled part of the rally in oil prices this summer, analysts said.
Open interest in the Nymex light sweet crude oil contract has fallen to a 15-month low of 1.3 million contracts, according to Reuters EcoWin data.
Margin calls on oil hedges are not just hitting small companies. Independent refiner Tesoro, which holds about 30 million barrels of oil in inventory, in June warned that hedging losses would cost it $125 million this quarter.
Refiners like Tesoro have little option but to hedge their inventory positions because big swings in the price of crude could lead to huge losses.
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