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Linn Energy, LLC (LINE) Message Board

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  • jeddiemack jeddiemack Nov 20, 2008 10:47 PM Flag

    10Q on Counterparty Risk

    The counterparty risk in September is minimal as the replacement cost of the contract - or then prevailing commodity price oil of $90 a barrel or so. The counterparty risk of non-performance goes up materially since the price of the replacement commodity in the event of default is realized.

    In otherwords, if the put contracts at $90 are replaced by market contracts at current $50 barrel rates the loss to operations becomes substantial.

    The key thing here is, can the counterparty meet its obligation to purchase oil at $90 a barrel if they don't have the $$ to buy it and create wealth at $50 a barrell sold into the market? Without collateral?

    Obviously, right now, it would make some sence for Line to buy $50 a barrel oil and sell into the $90 contracts as opposed to producing it?

    There may be a hedge here for them to start putting collars on the prices to lock in the gains?

    If Linn trades lower.... I will add a few shares.

    Would be nice at these levels if they'd start repurchasing some units or give us monthly distributions so we could accumulate.

    Good luck to all

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    • Jed, I may be misreading your post, but I think you may misunderstand LINE's hedges. They are not contracts to deliver oil or NG. They are puts and swaps (with some collars) which require cash settlements based on the difference between the applicable commodity price index and the put or swap contract prices.

      In fact, where the put price or the swap price exceed market prices, LINE could theoretically cut its production to virtually nothing and simply collect the settlement payments, but it would then lose the revenue associated with selling its production at the applicable market price. So long as its marginal revenues on commodity sales exceed the marginal cost of production, it is better off to continue producing and selling into the market.

      Many producers are obviously concluding that marginal production costs are too high, which is part of why capex is being cut at many MLPs and other producers and producers are looking at how to keep production flat at the lowest possible cost in the near term.

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