Replies to This Discussion

Permalink Reply by The_Baron on August 17, 2009 at 8:51

When gas prices were only going up, utilites and big industrial users probally thought that $9.00 would be cheap, and then the economy imploded.

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Permalink Reply by Parkdota on August 17, 2009 at 10:49

Thanks for the info.....I've heard many people talk as if hedged prices were what they were going to see in terms of royalties but now I know differently. You mentioned that we really won't see the effects as consumers via electric/gas bills for a while bc of the hedges and that is also very helpful info from a consumer standpoint. My initial thought was that the hedges will come down helping us as consumers but there's really no way to tell for sure. I'm guessing that producers will hedge lower than the hedge they have for 2010 due to poor price pressure thus helping our elect./gas bills. I can see where companies that don't hedge could really be hurt by our current poor prices thus allowing those that do hedge to really do well even if in poor times. It's all so complex.

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Permalink Reply by Les Bamburg on August 17, 2009 at 14:49

Logan, some companies such as EOG are hedging little of their 2010 volumes because they believe prices will improve.

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Permalink Reply by Parkdota on August 17, 2009 at 15:57

Which makes sense bc once the prices improve they can then try for better hedge contracts. If they make those contracts while prices are so poor the hedged prices wouldn't be as good thus meaning a smaller margin when prices go up. It's almost like looking at a parallel stock index.

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Permalink Reply by Checkmateking on August 16, 2009 at 2:50

Tell you what, say gas goes back up to 10 dollars a thousand but your producer is hedged at 5 dollars, would you want the hedged price then?

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Permalink Reply by P.G. on August 16, 2009 at 5:24

Would the producer be able pay the MOs if they had hedged at 5 and prices were 10 or more?
I mean when they hedge, are they gambling with all the gas produced or just their percentage interest of production?

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Permalink Reply by Grillin' - MmmMmm on August 17, 2009 at 1:43

In essence, a hedge is kind of a gamble. They hedge because a) they want to lock in a price and b) they expect prices to not exceed the hedged price. If it does exceed, as in your example, they don't "lose" any cash money, but lose the opportunity to have made a lot more.

Now, they still owe you your royalty payment based on an index price. But they only hedge their net after royalty gas volumes. And most companies don't hedge 100% of that, but some get pretty close. I know a few companies that are actually hedged more than 100% and they are just trading the financial hedge market. They'll probably close out a few of those contracts before the contract is due.

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Permalink Reply by Parkdota on August 16, 2009 at 6:18

I'm not sure....I originally assumed that hedging directly affected royalty receivers. So, when Encana said they'd hedged around $9 for 2010 I got real excited. Now I understand the dynamics which I would imagine can be very tricky for producers. I wonder how they faired when prices went up to around $12-13 in 2008?

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Permalink Reply by P.G. on August 16, 2009 at 9:12

Well my concern is if say they contracted for $5 and gas went to $10 or more, that would hit their bottom line pretty hard if they had to pay out royalties on $10+ out of the $5 they were getting, huh?

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Permalink Reply by Parkdota on August 16, 2009 at 9:20

Yeah, that makes sense. I'd like to know if that has happen in recent years. If it didn't happen in 2008 then I think that means they stay on top of things and wouldn't allow it to bite them in the rear. There's a lot to it I don't understand, although I'm trying to learn, so I'm gonna guess that they know exactly what they're doing. I somehow feel like they have control over the situation, although to what extent I'm not sure. Maybe it's why there is so much production right now even with poor prices bc they have to keep it below what they hedged. Maybe they keep hedges just above what the projected price will be. That way they do have some control. Basically hedged prices would then be a great indicator of where prices can top out at bc like I said, they'd always control supply to control prices in order to stay under the hedge.

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Permalink Reply by Zydeco on August 17, 2009 at 17:24

the simplest manner Hedging was explained to me was from a finical advisor that I just kept saying WHAT???? try it again. What????? .. about writing call options..

the example: a man says to the man that owns McDonalds . OH YOU SELL BURGERS. The McDonalds owner answers: NO, I sell burgers to create cash flow and I am really own real estate and invest in real estate. For some inexpliable reason I could grasp this small part of hedging. CREATING CASH FLOW.... and Logan it is very complicated, I agree with you. phew.

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Permalink Reply by Parkdota on August 18, 2009 at 8:30

Ha, I've heard that McD's analogy but not for a long, long time. I had forgotten about it...but it's a great one.

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