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Gold/Mining/Energy : Big Dog's Boom Boom Room

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To: Ed Ajootian who wrote (98569)	4/2/2008 9:18:37 PM
From: Fugitive Pauper	Read Replies (1) of 206232

Well said, Ed. LINE will record particularly large derivative losses in a rising market because they have fixed hedges on almost all of their NG production. At the other end of the spectrum in Encore Energy Partners (ENP). ENP is an oil-weighted partnership with a hedging strategy designed to capture most of the upside of rising energy prices. They have fixed hedges on 1/3 of production, no hedges on 1/3, and purchased put options covering the last 1/3. That gives them 2/3 protection on the downside as well as 2/3 participation on the upside. Plus, since royalties would decline if oil prices fall, they claim that even with only 2/3 downside protection their cash flow would not significantly decline even at $40 oil, at least for the life of the derivatives (about 3 years). This approach costs significant money to purchase the put options, but I think it's a good bet today. ENP is not particularly cheap at today's price, but their oil weighting (70+%) and hedging strategy are attractive to me. That, and I like the Brumleys; Jon and Jonny are crafty old boys, even though Jonny is under 40. I picked up a double-scoop on the two brief plunges to around $17 late last year.

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