Replies to This Discussion

Permalink Reply by Bobi Carr ("parker") on May 16, 2009 at 6:55

Jaybird,

Let's say we are talking about corn instead of gas. The farmer needs the money to pay for diesel, etc. He "pre-sells" a portion of his yield to the bread company. The farmer gets a fixed price and the bread manufacturer gets a fixed price for a specific amount of yield. Therefore they can both go about their respective businesses with some sense of predictable outcome.

It basically comes down to setting the price that you will pay for something that you will get in the future.

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Permalink Reply by Jaybird on May 16, 2009 at 7:03

Understood! That's a good way of putting it. Very simple and I do understand it! Thank you.

It's kinda like let's make a deal on pricing so both parties involved can go about their business for a certain period of time during the year. I thought that might be what "hedging" was but I didn't want to assume!

Thanks again,

Jaybird

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Permalink Reply by Les Bamburg on May 16, 2009 at 9:36

Parker, in principle your example is correct. But just understand you are not fixing the price of the commodity but essentially a side arrangement that is independent of the actual commodity. So let's say in March a producer "hedges" June gas at $7.00. He will then sell his June gas during bid week at the end May. The producer will then settle with the NYMEX exchange for the difference between his actual price and the $7.00. My assumption is royalty payments are likely to be based on the actual price.

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Permalink Reply by Bobi Carr ("parker") on May 16, 2009 at 13:51

Les,

That is my assumption as well. I also don't see where it should be handled differently (unless I contract with the producer to "hedge" my gas as well).

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Permalink Reply by P.G. on May 16, 2009 at 8:04

What would happen to leased mineral owners if the lessee contracted a future price and market prices rose higher than the contracted price?
Or would lessors get market regardless of what the lessee did?

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Permalink Reply by Jaybird on May 16, 2009 at 8:14

That P.G. is a darn good question!

Jaybird

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Permalink Reply by Jaybird on May 16, 2009 at 8:40

MSFVA,
I think the question is this:

Would the mineral owner get there % of royalty from the "hedged" price of gas or the actual cost of gas if it's above the "hedged" price established by the Oil and Gas co. and the buyer?

If Hedged gas price is $6.00 and the price of NG goes up to $9.00...which amount does their Royalty come from... $6.00 or $9.00?

I think I asked that correctly.

Jaybird

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Permalink Reply by Checkmateking on May 16, 2009 at 9:29

I am pretty sure most leases state current market price, it works both ways for the gas company, if they are hedged at 9 dollars and the price falls to 5 dollars they would make a killing.

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Permalink Reply by P.G. on May 16, 2009 at 11:08

Who then pays the lessor? The lessee? If he is getting below market because he hedged for $6 and the market goes to $9, that would about wipe the lessee out if he had to pay the lessor $9 out of his $6 wouldn't it?

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Permalink Reply by Mattie on May 18, 2009 at 15:13

No worry. Operators would never hedge a royalty owner's production share. Rarely do they hedge over 75% of their total working interest ownership share....reason being is potential interuption in production, unexpected decline over time, etc., which could result in hedge losses with no offsetting production sales gains. If they did overhedge, they get what they deserve. Such would be considered a "speculative position" by any competent accounting audit. Royalty owners are protected from getting "under-paid" by virtue of an losing hedge position...they generally will get a "market price" that is reflective of a regional monthly index posting from industry-recognized publications such as Platt's Gas Daily "Monthly Price Guide", which identifies all major interstate pipelines in specific regions including NW LA. If not paid a "fair market price", then the Lessor can likely sue the Lessee for breach of contract and demand payment and/or cancellation of the lease.

Operators and large consumers "hedge" in order to protect their budgets....they are not "gambling" as some have suggested. Sometimes, such as early 2008, producers get lucky and have the opportunity to lock in at much higher rates than budgeted. Those who had the financial/credit capability to execute hedges in 2008 and chose not to do so should be considered the true "gamblers". Locking in a guaranteed price can be done thru either execution of NYMEX and "location basis" derivatives contracts, which are "paper transactions" (true hedge) -or- they can be executed by transacting a "fixed forward physical sale" (i.e. pre-selling the actual product to a buyer rather than involving futures or derivatives hedges). Both accomplish the same thing. When an operator or large consumer "hedges" or does a "fixed forward physical sale", they are required to provide "credit assurances" of their ability to deliver the gas (producers) or pay for the gas (consumers) throughout the time duration including the months of delivery. Margin calls on derivatives & NYMEX contracts can be steep if prices go adverse to the hedge position. Fixed forward sales also generally carry some type of "financial penalty" similar to NYMEX and derivatives contracts to protect both buyer and seller.

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Permalink Reply by Mattie on May 18, 2009 at 15:22

P.S.....

Also, note that the wellhead price will usually be discounted from the interstate "index" posted prices shown under these publications to reflect the transportation/gathering costs on intrastate pipelines to get the gas to a common "pooling point", such as Texas Gas Transmission (Zone 1), which is one of many NW LA pipeline index postings.

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Permalink Reply by king john on May 16, 2009 at 11:15

this came up a couple weeks ago in another thread and i thought LA. law had a provision for royalty owner to receive the hedged price. i will see if i can find it again .

you all are correct in that most leases do state "well head price"
i am in a current lease that states well head price but also says more particually
"the amount realized" so that leads me to believe i should be receiving my share of whatever they sold it for not the average market price.
i did ask my operator about this and they explained to me that passing the hedge along to a royalty owner would be putting the owner at risk because hedges dont always work.
king john

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