Dong Cuts Hedges After Freeing Gas From Oil-Index Ties

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Dong Energy A/S will cut its internal hedging of oil prices as it reduces oil-indexation on long-term gas contracts, Chief Executive Officer Henrik Poulsen said in an interview.

The utility, which Goldman Sachs Group Inc. bought an 18 percent stake in last year, has traditionally used its North Sea oil and gas output to counter the risk of price swings in its long-term gas contracts. But that hedge is becoming less important as Dong renegotiates gas contracts.

“The market reality is quite new after oil prices dropped to half their level 12 months ago,” Poulsen said in a phone interview on Wednesday. “I’m not sure it’s strategically important but” the internal hedging is “providing operational gains.”

Dong and its biggest owners, the Danish state, Goldman and pension funds ATP and PFA A/S, are waiting for a review by JPMorgan Chase & Co. to be completed before deciding how best to approach an IPO. A number of creditors have already signaled they want the company to exit the oil and gas business, and sell Exploration and Production, before Dong goes public.

Dong’s revenue from offshore wind power jumped more than 61 percent last quarter while oil and gas revenue dropped 24 percent. The company saw its fossil-fuel income slide even after hedging, allowing it to deliver at prices higher than spot levels.

Poulsen said oil’s decline has forced Dong to make sweeping cuts in its E&P unit “from purchasing prices to exploration costs and maintenance costs.”

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