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Peering over those high hedges

While the global oil price has been tap dancing to new peaks, the share prices of leading Australian oil companies could only perform a soft shoe shuffle.

Woodside has clambered up from a low of less than $10 this year, but is now struggling to hold the $14 level. It would not even have got that high, without the presence of ardent suitor Shell breathing hotly down its neck.

Santos sulked under $5 for ages, before suddenly gathering its skirts and dashing through $6.30 – but again takeover prospects were a major impetus.

Woodside bought a stake in Oil Search for $2.10 a share last year, and those are now changing hands at $1.65. It is an even more dull story for the junior oil and gas chips.

The major reason for this state of affairs is that Australian companies have hedged away up to half their production for this year and next. They have sold the oil forward to traders on the New York Mercantile Exchange at 1999 sticker prices – foregoing hundreds of millions of dollars in revenue.

The half yearly report of Woodside shows that 50.8 million barrels had been hedged at varying maturities up to four years at an average of US$17.96 a barrel.

Another nine million barrels have been handed over in the options market at similar levels. Meanwhile, the price of oil has shot up to US$35. If claims by Iraq that Kuwait has been pinching its crude translate into hardware flying over the region, you can start chalking US$40 on the blackboard.

Did the size of the hedging need to have been that high? Briefcase is not aware of the shape of the forward book of the US oil giants, although we did notice Exxon Mobile shares have just hit a 10-year peak of US$89.

To be sure, 20-20 hindsight is a wonderful thing. Scarcely anyone thought OPEC could hang tough for as long as it has in holding supply off the world markets.

However, even visually challenged Freddie, might have seen that the demand side of the equation was white hot, given the US economy running on steroids with Viagra chasers, and Asia coming back strongly.

Prudence dictates that companies sell a significant amount of oil forward and lock in a proportion of future revenue to provide funds for expansion in a very capital hungry business.

Woodside has reduced its gearing by 7 per cent to 43 per cent this year, but has net debt of nearly $1.5 million, half in syndicated bank loans, and the balance in notes and commercial paper.

Woodside director Jillian Broadbent defended the forward sales policy at a banking industry lunch last month, and said she was comfortable with the company’s level of hedge cover.

We got the tip on that the other day from the little Perth-based Amadeus Petroleum NL which has a number of wells in Texas.

Managing director Geoff Towner said 50 per cent of the Amadeus production is hedged at US$20 a barrel until December this year, rising to US$25 in 2001, adding that this was in line with historical prices used by the banks.

So it seems, if we really stretch, we can blame banks for the lacklustre showing of Australian oil shares. It is understandable that bankers need the security of steep collateral against their loans in a volatile business.

But do they need a belt, braces, and a cummerbund too?

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