Anyone have any guess where the price of gas will bottom out.  I want to know when to stop holding my breath.

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then they lose money.

So then drilling companies may end up having to pay out more in royalties than what they are getting for themselves..huh?

If the leasor/owner got a fixed$$price royalties rather than market rate+plus$$, it will kill off the leasee/producer, and producer declare bankruptcy and leaves...leaving leasor with holes in their ground and then who is responsible to plug/abandoned or does the leasor buy the well and pad and sell it sometime later....Tom 

The mineral owner accepting the lease is the lessor.  The company offering the lease is the lessee.

More importantly, typically there is a bond or other financial assurance and what not - if someone was really stupid with their hedges, and went bankrupt, at least theoretically, the bond would cover the plugging costs.  That said, if it was a decent well, it would probably be sold to another operator in the bankruptcy auction..

Hedging can help or hurt - prior to being acquired by Exxon, XTO had a fairly aggressive hedging operation.  Don't know if they still do.  They hedged a lot of production in the $6-8 $mcf range, which hurt their results when gas was at $12/mcf. 

I doubt CHK will hedge their gas price below production costs, but if I were developing an oil play and was getting a bit of gas - I might be tempted to hedge my production at say $2.50/mcf, particularly if I could do that to generate some revenue up front.  Likewise, if I were conducting leasehold activities in the Hanyesville, Marcellus, or other formation right now, I would be tempted to hedge at prices below cost, as long as I thought I might beat the market rates.  

An operator like CHK might hedge across a range of prices - perhaps some of their production at $2.75, some at $3.50, and as much as possible at $5+ - of course, at $5+ its hard to find folks willing to hedge at that price right now.  Someone with more financial knowledge than me can shed more light on this. 

Someone is promising to deliver cheap NG or there wouldn't be a futures market for it...so if prices get to say $8..and a royalty owner would be getting 25% of that market price...what would that leave for the driller if he has to deliver $2 NG he contracted?

Welcome to Hedging/Futures/Options and Risks Management - no free lunch - just ask any independent driller/landsman - ask anyone who had $500K in their 401K in 2006 as to what they have now....

Realtime - LosAngeles DWP were talking of Future prices of $5-6 for next 20 years - If a supplier agreed and the contract was goodNtight - he can buy at $2 and sell at $5.50...he makes a lot - what is the risk of $7 NG for the next 20 years - I believe very low...0.005%  Tom

 

I'm no MBA...

but if I buy futures at ~3/Mbf and prices go to ~4/Mbf.... I sell at 4 and make 1 in profit...

...I buy futures at ~3/Mbf and prices go to 2/Mbf... I sell at 2 and make 1 in losses...

I may be wrong (wouldn't be the first time)... but that's the way I see it.

I've got one well, that up until last month, was bringing ~8.50/mbf for gas... figure the company sold long term contracts, and the contractee lost almost $5/mbf for almost two years.

not quite the way it works.

 

more like someone locked in a price but could have gotten better. Look at you gas bill... it is the poerfect example of what happens when a company locks in a long term price for garunteed delivery.

sorry... no gas bill here... my ng is free and legal... so I haven't got a clue how much folks have to pay for ng as a consumer.  I know my royalty checks range from spot all the way to 8.50...

If someone buys/hedges a future supply contract at $2 and the supplier agrees to provide at $2...the supplier takes it in the neck....If someone (=LosAngelesDWP) hedges a contract to supply gas in the future to them at $6 without an escape clause then they they pay $6 even if the price is $4...Welcome to the Market Place - same way with royalties read the fine print for escape clauses at the leasees disadvantages.

The next three years are going to be/are going to be wild...Tom

Does this mean that the oil company (supplier?) might commit to a future supply at $2  and if gas went up to say $4 the royalty owners are stuck with a $2 price at their well? 

If this is the way it works I smell a huge scam working .. starting with manipulation of the price of the gas downward, then the supply contracts, then the manipulated rise in prices.

Maybe I am not understanding who the "supplier" is that is doing the contract.

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