Companies may reach agreements with financial institutions to hedge a portion of their oil and gas production in order to provide them with downside protection should the price of oil and/or gas go below their credit facility comfort.

Some companies manage the risk of price fluctuations by hedging. When an oil producer hedges the price of his output, he essentially locks in a cash flow. If the price of his physical oil drops below the hedge, his net earnings increase, but if the physical price rises above the hedge, his net earnings decrease. Hedging ensures a certain rate of return and thus piece of mind for the producer. Oil hedging is an individual company’s decision. It depends on: short-term oil price projections; if the company is a supplier (hedging against bearish markets) or an end user (hedging against bullish markets); what percent of the company’s expenses or profit the oil represents; the company’s risk tolerance