A Reuters review of regulatory filings, market data and interviews shows the real price of Occidental's 'costless' oil hedge by Devikakrishnak davidj_french
- In just 12 days, Occidental Petroleum Corp pulled off one of the biggest hedges against falling oil prices ever placed by a U.S. energy company. It characterized the transaction as “costless” but a Reuters review of regulatory filings, market data and interviews shows that’s not the whole story.
However, to secure the hedge swiftly and discreetly and to avoid paying its bankers a fee for arranging it, the company took a bigger potential hit to future revenues with only limited protection against falling oil prices, according to a source with direct knowledge of the transaction. While Occidental has disclosed the details of the 2020 hedge in regulatory filings, the absence of a hedge against falling oil prices in 2021 was not explicitly mentioned. The company said the 2021 options were meant to increase the maximum selling price it would receive for 2020 sales.
However, other analysts said Occidental needed to secure a hedge quickly to defuse some of the pressure from investors. Billionaire activist investor Carl Icahn was campaigning against the Anadarko deal and Anadarko itself had issued a regulatory filing on July 29 saying its calculations showed that Occidental, even without an acquisition, would not be able to generate enough cash to pay its dividend for the next three years.
In illiquid private markets, big transactions are more difficult, and therefore more expensive, to execute. If rival traders get wind of a deal before it is fully executed, they could get in first with their own buy or sell orders, pushing up or down the target price.
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