Introduction To Hedging In The Bakken -- Mike Filloon -- February 23, 2016

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There is one type of hedge that may be problematic for operators in 2016. The three-way collar is a collar where there is selling of a further out-of-the-money put option. This is also known as a subfloor. Operators engage in three-way collars because it has a lower cost. In some cases, these generate revenue. The issue is added risk. By selling a further out-of-the-money put, it is possible an operator will see limited downside protection. By adding the short put or subfloor, it decreases the benefit of the long put or floor. The tighter the differential from the floor and subfloor, the less beneficial the hedge with low oil prices.