Replies to This Discussion

Permalink Reply by Mattie on August 15, 2009 at 9:15

You can expect a price equivalent to a monthly "index" relative to whatever pipeline your gas gets delivered into. There are a variety of pipelines in N.LA that will vary from 1-2 cents to sometimes much greater, primarily depending on the constraints that affect the line downstream. Texas Eastern (East Texas zone); Texas Gas (Zone 1); Carthage Hub; SONAT; and % of Henry Hub index are but a few of the historical postings for North LA gas supply. Hopefully, with all the new pipelines being built, the constraints will lessen, but there is a real question as to where all the gas will go. Bottom line, the hedges that a producer puts on has no effect on your gas price netback.

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Permalink Reply by Parkdota on August 15, 2009 at 9:55

Ah, I see....that's a big help. Thanks.

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Permalink Reply by Parkdota on August 15, 2009 at 13:10

I just had a 3 hour drive and thought about this some more. If the hedges don't help on prices that directly affect me, then what do they help? Is it possible that hedges affect future prices which do indirectly help us? Why would Encana make such a big deal about hedged prices? I follow the Henry Hub monthly.....is their price what I should use in my calculations?

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Permalink Reply by Les Bamburg on August 15, 2009 at 13:22

Logan, the hedging helps (or hurts) the producer only. This gives them an assurance of a minimum cash flow so they can cover their capital expenditure during the time period hedged.

If EnCana "locks in" a Feb 2010 price of $6.00/MMBtu, it helps if the actual price is $5.50 but hurts if the actual price was $6.50. Royalty is paid based on the actual price.

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Permalink Reply by Parkdota on August 15, 2009 at 13:32

I got ya. Then according to the info they posted they stand to do very well which in turn helps their shareholders I guess, which is why they're talking it up. Also, it stands to reason that the producers aren't slowing down on natgas drilling bc under your mentioned scenario they can all do well if they priced it right. Most that I've read up on have price it very well. Thanks, that info answers 2 questions that have been bothering me.

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Permalink Reply by Grillin' - MmmMmm on August 17, 2009 at 1:47

You got it right logan. Many companies are currently being paid over $9 for their gas because of hedge contracts. That gives them free cashflow to keep investing in drilling, even though our market is so over-supplied. That over supply is what's holding down market prices. So, while the hedged companies are getting $9 and flooding the market, everyone else is getting $3 but they just keep on drilling. This works out great for hedged companies as they get to keep drilling and HBP leases. It helps consumers as prices are really low (wait for it to show up in your electric and gas bills...you may have to wait a while, though, cuz your electric company buys gas in advance so they're still burning high prices...they are the ones on the other side of that $9 hedge contract!!).

It hurts companies that don't hedge (the big supermajors) and the royalty owners!

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Permalink Reply by king john on August 17, 2009 at 1:58

Mmmarkkk. why on earth would any company pay $9 for gas when fair market value is much less. i realize these costs are passed on to the consumer. but how does the company justify paying 3 times the market value??? o.k. , these hedges are to protect against future price spikes, what price spikes... that's what i say ?
kj

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Permalink Reply by Les Bamburg on August 17, 2009 at 2:51

KJ. let's say you are a big power generator that is looking at it's 2010 plans. And let's say you could lock-in the cost of 70% of your natural gas at a $6.30/MMBtu NYMEX Henry Hub equivalent price. Would you take a chance on actual prices or lock-in now?

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Permalink Reply by king john on August 17, 2009 at 2:58

yes Les, i would probably take that risk, but 3x ? i honestly would have a hard time taking that risk. is that to say that the purchaser of this hedge thinks N/G will be above $9 mcf in 2010 ?
kj

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Permalink Reply by Les Bamburg on August 17, 2009 at 3:06

KJ, the NYMEX hedge level is closer to $6.00/MMBtu for 2010 - not $9.00.

Permalink Reply by Grillin' - MmmMmm on August 17, 2009 at 6:44

What you are missing is that when they signed these contracts, gas was selling at $10 and $11. These are contracts over a year or so old.

Permalink Reply by Grillin' - MmmMmm on August 17, 2009 at 6:44

Because they signed a contract to do so! That's why. They signed these contracts back when prices were higher and they locked in a guaranteed price vs. letting it fluctuate and risk it going higher.

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