Replies to This Discussion

Permalink Reply by Jaybird on May 16, 2009 at 11:21

Thanks to all. We are not leased but I do have a contract offer ( from last year ) so I will read it and see what it says.

Thanks for all of the information. Very helpful!

Jaybird

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Permalink Reply by Carter on May 16, 2009 at 13:36

J, thanks for giving the thread the delightful air of a Yahoo Finance message board. Nice. If you need to buy minerals, here you go: And make sure to pay 'em quail prices.

http://content.screencast.com/users/divergence/folders/Jing/media/5...
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Hedging can be complicated. It basically protects against risk and price volatility. First, most operators will market gas for you, and that is sort of the de facto thing that folks do, and it might be the easiest thing if you are just a small royalty owner. But if you wish to use another gas marketer, you are free to do so. That is really about marketing and not hedging, but it is relevant if you are trying to "take control" of your own production.

A larger producer will often hedge production or a % of their production for a given time frame. In exchange you give up the upside, so if one were to hedge at $7 and gas were to go to $10, you would actually owe the $3 to the firm that hedged you. It is like a debt that you owe, and if you hedge any larger amounts of gas, you will often have to keep a line of credit at a bank to make assurances that you can pay your debt before someone else takes on the risk.

Commodity futures are a little different when a farmer/producer knows they can deliver a certain commodity in the future, but want to lock in a given price/profit level right prior to planting. What they will do is SELL a number of contracts for that commodity equal to the amount they anticipate delivering to the market at the future date. For example if you were a farmer and anticipated delivering 50K bushels of corn in the fall, say that corn was then trading at $5/bushel and you wanted to lock in that price. You would sell short 10 contracts (5K bushels = 1 contract) of Sept. corn at $5. You would then make delivery at the local silo, etc. in Sept. and get paid whatever the spot price was. Well if spot price in Sept. was $4, you would lose $1 there but profit $1 on your futures short. $4 + $1 =$5. If the opposite happened and you sold spot @ $6, you would lose $1 or the futures contract, but still get your $5 that you wanted. Takes the risk off of you as a farmer.

Hope that helps.

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Permalink Reply by Jaybird on May 16, 2009 at 14:24

That's why I asked the question about "hedging". I didn't understand it.

Why don't you give us your 2 cents i ? Explain hedging to me please.

Afterall, isn't this haynesville website for everyone to learn?

Thanks to everyone who atleast tried to explain it to me.
Jaybird

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Permalink Reply by P.G. on May 17, 2009 at 4:22

Wouldn't the lessee selling future gas be like gambling? I mean if prices rise, he loses. So that's why I wonder who cuts the checks to the land owner? If the lessee is responsible to the land owner (lessor) for his share and he hedged and is getting lower prices than the land owner should be getting, if he doesn't have the funds, what then?

Or does the end gas buyer have to keep track of who is suppose to get what and cut multiple checks to every lessee and land owner?
I'm still confused.
Most of the posts specify what folks should get but Who is cutting all these checks for different amounts to all these lessees and land owners. Aren't there likely many in a section?

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Permalink Reply by Les Bamburg on May 17, 2009 at 5:33

PG, my opinion is hedging has zero impact on royalty payments as it is completely separate and independent of the physical sale of gas. The hedging does not typically occur with the actual purchaser of the gas but with a completely different counterparty.

So if Producer A sells June gas to Marketer X for $6.00/MMBtu it doesn't matter that Producer A also hedged June gas with Bank Z for $7.00/MMBtu (or $5.00/MMBtu). The $6.00 is collected from Marketer X and royalty paid based on that price in my opinion.

This is not really gambling since its purpose is to lock prices and fix the economics of production and insuring cash flow is sufficient to cover capital programs. This is done for all types of commodities by buyers or sellers who want to lock prices.

When this activity is done by parties that are not buyers or sellers of the physical commodity it is referred to as "speculation" and is effectively gambling. Most companies are not allowed to speculate by management.

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Permalink Reply by The_Baron on May 18, 2009 at 3:07

The Oil Buisness is gambling.

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Permalink Reply by P.G. on May 17, 2009 at 15:18

So if you are a land owner, who hands you a check for your share? The operator/lessee?

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Permalink Reply by Les Bamburg on May 18, 2009 at 2:59

Csc, did the statement have a production month?

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Permalink Reply by P.G. on May 18, 2009 at 2:57

My point is that if the lessee has hedged for what turns out to be very low prices compared to current prices, could it be possible he might not be able to pay the lessor without going into the hole financially. I know the lessee hedged to lock in a price that would assure he could pay his expenses, with some profit of course, but if he also has to pay the land owner out of his money, that would also make the land owner one of his expenses too, right?
So by the operator/lessee hedging future gas sales, wouldn't he also beting the land owner's gas money as well?
If the original lessee was a flipper, or middle man, what would keep him from simply walking away from his responsibilities to the land owner if he had hedged and prices become unfavorable for him?
If say the government promotes NG for transportation, NG prices could go through the roof and land owners could be owed a lot of money but if the lessee/operator had made a bad hedge deal and isn't getting enough to cover expenses and to pay the land owners, sounds like the land owners could be left holding the stick here doesn't it?

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