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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: 7 Years who wrote (41471)	3/3/2011 10:23:40 AM
From: E_K_S	Respond to of 78670

Hi 7Years - It looks like many of the small E&P companies are moving again today with crude oil very close to multi year highs ($102/barrel). One of the things I will be looking at in my basket is how have my companies hedged their production out for 2011 and 2012. For the companies that I want to hold long term and have pretty much fixed production costs, I would like to see appropriate hedges that at least cover their production costs. This would apply to the larger producers with many wells under production. For example RAM Energy Resources, Inc. (NasdaqGM: RAME ) (posted on Yahoo) "...RAME has collars on about 1/3rd of their oil for 2nd/3rd & 4th Q of 2011. 1/5th in Q1/2 of 2012 as of today. The price is $80-$105. If the price goes up above 105 they only get to sell it for 105 but it's only 1/3rd of their oil..the other 2/3rds goes to spot price. RAME placed the $80 floor because this guarantees profitability taking away some risk. This is a very common hedge practice with oil & gas...." ------------------------------------------------------------------ I have also noticed that many of the micr-cap and smaller E&P companies do not even bother to hedge. Their production(s) are small and/or still in-the-ground and it's more a function of drilling their well(s) and raising the necessary capital to complete their projects. Hedging their production is not bad and can be very good especially when historical prices are near lows and/or below their cost of production (ie NG is an example). That's why E&P companies with "oily" assets will probably run higher as crude moves higher and can be amplified based on how much of their production is hedged. Because RAME has so many wells producing Oil (interests in over 4,000 well w/ 33.9 million barrels of oil equivalent) and they have hedged 1/3 of their production (which covers their costs) 2/3 of their production may fluctuate with the market crude oil prices (both up and down). More food for thought when looking at how Mr. Market values these companies as crude moves higher. Remember that when crude falls in price, you should get the same relatives stock price moves downward. EKS