As energy hedging consultants, we're often asked: What are the most common mistakes oil & gas producers make regarding hedging and risk management.  In no particular order, here is our top seven list as well as our take on each: 

7. "We no longer hedge because our hedges never made money." Hedging shouldn't be considered a potential source of revenue.  A sound oil & gas hedging program should provide one or more of the following:

• Cash flow certainty
• Revenue certainty
• Ability to lock in a profit margin(s)
• Protection against potentially declining prices

6. "Go ahead and start hedging but don't leave money on the table." The vast majority of hedging mistakes are the result of a poor or nonexistent hedging policy and/or the lack of well designed hedging strategy(s).  Most hedging mistakes can be avoided if you take the time and effort to create a hedging policy and develop and implement strategies that allow you to meet your hedging goals and objectives.

5. "Our CEO and CFO disagree on where prices are going to be in the future." Hedging decisions shouldn't be made based on your view of future prices.  If it were so easy to predict where prices will be in the future, many of us would have retired early and spend our days on the beach and golf course.

4. "We're going to wait and see what prices do over the next few weeks." Again, what do you do if/when prices decline?  Do you continue to wait or do you "throw in the towel" and hedge?

3. "We hedge when we see good opportunities." What if a good opportunity doesn't present itself anytime in the near future?  What do you do if the bottom falls out while you are waiting on that good opportunity?

2. "We only hedge when we have a strong view about the market." What if your view turns out to be flat out wrong? 

1. "Since prices have been increasing we're going to wait to begin hedging until prices begin to decline." What if prices begin to decline rapidly?  Are you going to have the discipline to hedge at that point or will you wait to see if prices bounce back before you hedge?  As has been previously mentioned, trying to forecast prices is most often a fool's game. 

In summary, if you desire to have a successful oil & gas hedging program, develop a sound hedging policy (which includes strategies that "work" in both high, moderate and low price environments) and stick to it.  Recall, pigs get fat, hogs get slaughtered.