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Breitburn Energy Partners LP Message Board

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  • chuckjohnson89 chuckjohnson89 Mar 13, 2010 9:06 AM Flag

    unrealized derivative losses

    Thanks for the input NYH. What you describe is essentially the sale of a call option by the company. In this case, Ruth's charecterization as an opportunity loss seems fairly accurate.

    I believe a more likely scenario to be the purchase of put options by the company to insure a sale price of the underlying commodity. If the price of the commodity rises, the option expires wothless and the company takes a loss equal to the original price of the option. If the price of the commodity drops, the call option rises to covver the difference between the strike price of the option and the price of the commodity.

    The question is how do we get unrealized losses greater than the total production of the company?

    After reviewing the hedge positions of BBEP which are available on thr IR page of BBEP's web site, we have hedge positions going out 4 years. The unrealized gains/losses are attributable to the entire 4 years of contracts but are apparently accounted for quarterly in the financials.

    So, it seems that large fluctuations in these numbers is due to 16 quarters worth of volatility in the futures market. Note the MM388 unrealized gain in FY '08 and the MM219 loss in FY'09.

    Correct?

    Thanks again, CJ

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    • http://www.sempracommodities.com/oil_producers.asp

      Excellent paper from Sempra Energy Trading on hedge strategies.

      Bottom line - The swaps we see in BBEP or others are essentially forward sales of the commodity at an agreed upon price.

      Similar effect to a put purchase, but no commissions involved in the transaction. The unrealized gains/losses reported are the difference between the preagreed swap price and the market price at expiration of the contract.

      As Ruth previously stated, an opportunity loss as opposed to an actual cash loss. CJ

 
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