Replies to This Discussion

Permalink Reply by JETHRO on August 19, 2009 at 16:58

LET ME GUESS ...IF YOU HAVE A WELL YOU WONT GET ROYALTYS OF THESE PRICES RIGHT?

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Permalink Reply by Grillin' - MmmMmm on August 20, 2009 at 1:38

Yes, Jethro, your cyphering is right! Hedges are financial contracts not associated with the gas flowing from any particular well. Royalty owners get the price paid at the index referenced in the lease. CHK may be getting $7.65, but you're getting $3. BUT remember, when prices were running up last year, CHK's hedge contracts were at $9, and you were getting well over $10.

All royalty owners have the ability to go out and do a little bit of hedging; not with the type of contracts CHK and others use (don't think most have the backing and where-with-all to enter into those monsters) but you can hedge by using ETF's like UNG and/or options. Again, not a place for the untrained or the risk-adverse!

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Permalink Reply by king john on August 20, 2009 at 2:40

Mmmarkkk, could you elaborate on...ETF's like UNG and/or options, i have never heard of this and would like to know more. also, i am curious if you may know how an operator arrives at the well head price. if they are paying me (royalty owner) $3 mcf, does that also mean they are paying their W/I owners the same rate? thusfar it would seem there is alot of flucuation in prices between operators.
in the same month there may be as much as a 30 percent difference in the price i get for gas from a couple different operators. just seems a little fish'y for there to be such a difference between operators. thanks for sharing your knowledge !
kj

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Permalink Reply by The_Baron on August 20, 2009 at 4:04

the price difference isn't fishy at all. You can see different prices for many reasons, quality of gas and who the buyer is for example.

Arkla is notorious for paying low prices for example. Sometimes you have to take a lower price because there just is no other option.

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Permalink Reply by king john on August 20, 2009 at 11:32

baron, do the W/I's generally get a better price than well head ?
kj

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Permalink Reply by Grillin' - MmmMmm on August 20, 2009 at 9:39

UNG is an ETF that was designed to track the price of natural gas; it does track the trends but is not exactly a replacement for the gas price index. That has to do with their ability to contract the gas futures, the monthly pricing, etc. My idea here is that if you are a royalty owner and are worried about prices going down, you could either short sale the UNG ETF stock, or buy put options on UNG. Now, shorting UNG is very very very risky and probably shouldn't be done by someone without a lot of experience trading stocks. Buying put options isn't as risky as you are limiting your potential losses to what you paid for the put. Generally, I would not recommend any of this for everyday folks.

Gas is sold by an operator into a pipeline system. Some operators sell the gas "at the wellhead" to the pipeline company. The pipeline company negotiates a price based on an index price minus tranportation and gathering fees. For North Louisiana, the index is less than the Henry Hub index you will hear quoted. The deductions to get to a wellhead price are negotiated as part of the contract negoitiations. Some operators actually use the pipelines to just transport the gas (for a fee) and the operator sells the gas further down the line.

Many of the royalty owners have contracts that dictate what can and cannot be charged against royalty volumes. I believe that's why a lot of companies are selling at the wellhead. Other royalty owners have gone further with their leases and specified a price index to be paid off of, regardless of what the operator gets for the gas. Smart way to do it, but I find most companies will give you that but take a little back elsewhere (pay less bonus, give less in royalty rate). But during the highly competitive bidding wars, they had zero leverage to claw back.

The variation from operator to operator is as The Baron notes in his reply. Company A negotiates a contract with Arkla for a certain set of fees. They then negotiate another contract with other pipeline companies, possibly for different fees. Company B negotiates a different set of fees. That why you can see swings. There are also different ways to work the contracts. Some folks have a $/mmBtu fee; others use a percentage of proceeds fee structure. Some gas requires just compression while other gas in the HS requires more elaborate processing and have higher deducts!

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Permalink Reply by king john on August 20, 2009 at 11:31

thanks Mmmarkkk, that's a plate full and i have a few questions. with that said i will have to postpone until tomorrow. out of time for now. thanks again !
kj

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Permalink Reply by Mac Davis on August 21, 2009 at 6:51

I'll bet there have been lots of companies that try to pay the hedged price when the hedged price is less than the free market price.

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Permalink Reply by Grillin' - MmmMmm on August 21, 2009 at 6:56

I'll take that bet! By lots, do you mean more than 30%? I'm guessing an overwhelming number/percentage of the companies in this business honor the contracts that they sign and stick to the terms. Yes, a few bad apples can spoil the whole bunch, but generally I think they all do the right thing!

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Permalink Reply by Digger1 on August 19, 2009 at 17:03

I guess it is getting to be a good time to invest in ng producers stock for the long haul.

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Permalink Reply by Les Bamburg on August 20, 2009 at 2:25

Sesport, as I have said previously - keep a close watch on pricing beginning in the 2nd half of September. This is when storage levels will top 3.5 Tcf and we will be in uncharted waters. As storage approaches the 4 Tcf level in early November, we will just run out of places to put natural gas. Some regions may experience issues earlier as their storage levels are already above 90%. Centerpoint's storage is at 82% whereas last year their level was 61%.

Hurricanes will not likely have an impact either as it would only effect offshore production and there is plenty of standby onshore production capacity to fill the gap.

Fortunately some LNG projects such as Tangguh and Snohvit have experienced delays or outages that reduces international supply but Qatar is ramping up two new "mega-trains" and cargos will begin to arrive in late August and September.

Several consultants are projecting sub $2.00/MMBtu gas prices. This will intially impact October sales prices that will be negotiated during Bidweek (late September).

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Permalink Reply by king john on August 20, 2009 at 2:43

Les, that news makes me nausias, but thanks for sharing it anyway.
kj

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