Replies to This Discussion

landownerPermalink Reply by Spring Branch,mineral owner on January 10, 2010 at 7:29

As always, thanks, Les. I may take you up on your offer!

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Oil & Gas ProPermalink Reply by Grillin' - MmmMmm on January 10, 2010 at 15:20

The reason, Les, is that the hedges aren't necessarily tied to specific gas. Hedges are financial contracts. So if they can get a higher cash price for the gas, then they gain a bit there as well. I know some companies that actually buy gas at times to back the hedges. Its a wild game in those instances as they are truly playing the odds. But most companies don't do that...too much risk.

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Permalink Reply by Forbes on January 13, 2010 at 6:01

Hi. I'm pretty new to this website, but the talk about hedges caught my eye right away. Question--if a company has hedge contracts like:

Natural Gas
$/Mcf
Region Mcf/Day Fixed Floor Ceiling Duration

Gulf Coast 8,811 $12.20 Jan. 2009-Dec. 2009
Gulf Coast 8,811 $10.22 $13.39 Jan. 2009 -Dec. 2009

Does this mean that if the gas company sells its gas during bid week for, say, $7.00/Mcf, that it will actually receive $5.20 more per Mcf if it is part of the fixed price contract or $3.22 more per Mcf if it is part of the second contract above? If so, how do you tell which contract it is a part of? The reason I ask is that in my lease agreement, I added the language that my royalty would be a percentage of the higher of the market value or gross proceeds received by Lessee at the point of sale. I defined market value as the higher of: (a) the sale price which the gas company or its affiliate negotiated in an existing contract and where the gas would be used to satisfy a portion of that contract; or (b) the price or value which is equal to the reported on-shore spot purchase price being paid during the month of production by purchasers of gas produced in the Texas Gulf Coast area to be determined on a monthly basis, by reference to the index spot gas price.
I was later told that the hedge contracts the company had were simply financial investments (i.e., not actual contracts for the sale of their particular gas).
Since reading this Haynesville post, I'm beginning to think the hedges are for actual sales of the company's gas.
Can anyone straighten me out? Help. Thanks.

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Permalink Reply by Forbes on January 13, 2010 at 8:38

Hi. I'm pretty new to this website, but the talk about hedges caught my eye right away. Question--if a company has hedge contracts like:

Natural Gas
$/Mcf
Region Mcf/Day Fixed Floor Ceiling Duration

Gulf Coast 8,811 $12.20 Jan. 2009-Dec. 2009
Gulf Coast 8,811 $10.22 $13.39 Jan. 2009 -Dec. 2009

Does this mean that if the gas company sells its gas during bid week for, say, $7.00/Mcf, that it will actually receive $5.20 more per Mcf if it is part of the fixed price contract or $3.22 more per Mcf if it is part of the second contract above? If so, how do you tell which contract it is a part of? The reason I ask is that in my lease agreement, I added the language that my royalty would be a percentage of the higher of the market value or gross proceeds received by Lessee at the point of sale. I defined market value as the higher of: (a) the sale price which the gas company or its affiliate negotiated in an existing contract and where the gas would be used to satisfy a portion of that contract; or (b) the price or value which is equal to the reported on-shore spot purchase price being paid during the month of production by purchasers of gas produced in the Texas Gulf Coast area to be determined on a monthly basis, by reference to the index spot gas price.
I was later told that the hedge contracts the company had were simply financial investments (i.e., not actual contracts for the sale of their particular gas).
Since reading this Haynesville post, I'm beginning to think the hedges are for actual sales of the company's gas.
Can anyone straighten me out? Help. Thanks.

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landownerPermalink Reply by Interested Party on January 7, 2010 at 19:06

Would it be true to say that if the price stays high in January we would see it in the February royalty checks?

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Oil & Gas ProPermalink Reply by Les Bamburg on January 7, 2010 at 19:35

IP, typically the only prices that are relevant are the February prices that are determined at Bid Week during the last five business days of January. That is when February base load gas is sold. The final February NYMEX Contract settlement price that occurs three business days before Feb 1st provides some insight into February gas prices.

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landownerPermalink Reply by Interested Party on January 8, 2010 at 5:04

Thank you Les for explaining this. Would this account for the peak in gas prices toward the end of every month when looking at the historical graphs?

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Oil & Gas ProPermalink Reply by Les Bamburg on January 8, 2010 at 19:06

IP, both daily spot physical prices and the NYMEX Futures Contract can fluctuate up and down throughout the month. Movement up in daily physically gas near the end of a month could be the result of some covering of pipeline imbalances to avoid penalties.

If you have a particular Index Point in mind I could generate a graph based on the daily physical prices.

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landownerPermalink Reply by P.G. on January 8, 2010 at 5:06

So who is selling the gas during the other part of the month to make the prices go up or down?

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Oil & Gas ProPermalink Reply by Les Bamburg on January 8, 2010 at 19:13

PG, some producers and gas marketers will hold back a small percentage of their gas to sale on a daily basis rather as baseload gas. Also, if a major consumer (such as a power plant) does not need all the baseload gas they bought in Bid Week, they can sell back into the market on a daily basis. Finally, if a producer brings a new well on mid-month, they will have to sell on daily basis since it could not be baseloaded for the entire month. These are just a few examples.

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landownerPermalink Reply by P.G. on January 10, 2010 at 5:37

I was under the assumption that RO's got a fixed percentage of ALL sales of gas produced from their unit.

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Oil & Gas ProPermalink Reply by Les Bamburg on January 10, 2010 at 5:43

PG, that is correct. I was just explaining the "timing" for when gas is sold in answer to your previous question. So the majority of the gas sales are "baseload" sold during Bidweek while a small percentage may be sold throughout the month on a "daily" basis. The RO value will be a mix of all gas sales from the unit.

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