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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: Think4Yourself who wrote (81725)12/14/2000 4:42:00 PM
From: Telemarker  Read Replies (2) of 95453
 
JQP, my view of what led to many of the bad hedges:

1) Over borrowing during last boom to fund overambitious exploration and drilling programs.

2) Commodity prices crashed, leading to really low PV-10 calculation results, leading to major writedowns triggering default provisions in loan agreements.

3) Lenders, certain as everyone else that oil and gas prices were going much lower yet, demanded that borrowers hedge so as to ensure adequate cash flow to service debt on prospective basis.

To be sure, each situation would have its own variations. I would be hesitant to conclude that a management is stupid solely because of the existence of bad hedges. If there was real stupidity, it was in their operational response to the last boom - that seems to have been somewhat cured during this cycle (maybe just because the capital markets took the keys away?).

IMO, some of the most interesting (due to their shareprices and multiples) microcap E&Ps have such ugly hedges in place. Some of these situations seem to have virtually no operational risk to sliding commodity prices - to a point, of course.

Unlike many here, I'm not a great trader but am happy to participate in such situations on a mid to long term basis.

Regards.
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