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Permalink Reply by Skip Peel - Mineral Consultant on August 3, 2021 at 9:53

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Permalink Reply by Steve P on August 5, 2021 at 7:50

I should but don't understand the hedge "swaps and collars" slide.  The prices listed for 3rd and 4th quarters of 2021 and all of those shown for 2022 seem pretty low to my untrained eye.  I know that NG producers routinely enter into these hedge arrangements, but is that primarily done as an insurance type arrangement in the event prices for their production drop?  Does this mean that my royalties may not reflect the actual market value for the month the gas is sold?

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Permalink Reply by Skip Peel - Mineral Consultant on August 5, 2021 at 8:18

Hedges, of whatever kind, are not applicable to the revenue of royalty interests.  That's good when a company hedges at a price that turns out to be too low compared to forward prices and not so good when the forward prices drop below the hedged price.  I don't look too closely at the price swaps or collars.  Pretty much above my pay grade. I'm more interested in the volumes that a company hedges.  I think that signals whether they are cautious about the near future or they see better prices ahead and don't want to hedge too much volume in order to take advantage.   I think that debt service demands enter into calculating hedges.  Protecting the capital investment for the year and debt service may be the prime considerations.  A number of companies are in the news for money left on the table after their hedges turned negative with the increase of price for both oil and natural gas.  EOG, which is famous for getting things right, is getting hammered over the huge loss of revenue due to their hedge position.  Lot of companies were too cautious and are now paying the price.  Lessors have no exposure but the stockholders ain't happy.

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Permalink Reply by Steve P on August 5, 2021 at 8:26

so royalty payments are based on the actual sales price by the operator?  How does the monthly "settlement price" figure into that?

I probably knew all this 10 years ago, but age creeps up on us all.

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Permalink Reply by Skip Peel - Mineral Consultant on August 5, 2021 at 14:20

There are three natural gas prices:  spot, futures and monthly settlement.  End users contract for what they expect to need for the next month based on the settlement price which is published the last couple of days of each month.  That price is a "basis" and an end user may get a discount or pay a premium based on the settlement price.  If the end user runs out of natural gas before the end of the month, they must buy what they need to complete the month on the "spot" market.  Both of these prices are for trading in physical gas volumes.  The futures price, which varies day to day, is for futures contracts which are traded in the market.  These are commitments to take gas at a set price and volume and are used by 'traders" who rarely take the physical gas.  They take a contract at a set price with the hope of later trading that contract at a higher price.  If the price goes down, not up, they suffer a loss but still trade the contract.

This is not part of my services to clients so I stand willing to be corrected by those with a higher pay grade.

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