In the Wall Street Journal, Amol Dhargalkar explains how hedges are shielding companies from price surges
Summary
The Wall Street Journal spoke to Amol Dhargalkar about how companies that previously locked in energy prices are being shielded from surging gas, oil and electricity markets, but that protection will fade as hedges expire and the costs of new ones catch up with today’s higher energy prices.
The Wall Street JournalThat means [companies] will still be hurt to some extent by higher costs, but will also have more certainty around their costs than firms that aren’t hedged at all, Amol Dhargalkar said.
Companies that previously locked in energy prices are being shielded from surging gas, oil and electricity markets, but that protection will fade as hedges expire and the costs of new ones catch up with today’s higher energy prices.
Companies typically buy forward contracts, such as swaps and options, to hedge currencies, interest rates and commodities. Many businesses have annual programs that set the size of their hedges and, on a quarterly or half-yearly basis, decide whether to add or reduce them depending on where markets are headed.
Those hedges are proving helpful in today’s environment, with companies including Associated British Foods PLC, speciality-chemicals manufacturer Evonik Industries AG and data-center firm Equinix Inc. saying they take away some of the financial risks associated with climbing energy prices.
But prices are now too high to be adding new hedges, companies and advisers say. “Most companies seem to say, ‘Let’s wait until things settle down a little bit before making any projections or decisions,’” said Amol Dhargalkar, managing partner at Chatham Financial.
The average price at which companies lock in energy hedges has gone up significantly from a year ago. Companies on Wednesday set hedges on U.S. diesel prices 12 months out at an average price of $2.69 a gallon, up 42% from a year earlier, a review of futures data from the New York Mercantile Exchange by advisory firm Chatham Financial Corp. showed.
The price that companies agreed to for European natural gas hedges 12 months out rose more than fivefold from a year earlier, to €100.06 per megawatt hour, equivalent to $109.21, as of Wednesday, Chatham said. In the U.S., firms locked in natural-gas prices 12 months out at $4.42 per million British thermal unit Wednesday, up 54% from a year earlier, Chatham found.
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