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Linn Energy, LLC (LINE) Message Board

  • richardfowler Nov 11, 2012 12:25 PM Flag

    Hedging Gains & Losses

    Are the mark to market gain and losses due to hedging practices actual cash losses ?. I think not but will appreciate comments from others much smarter than I.

    Sentiment: Hold

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    • Hedging gains or losses are not actual cash losses. Ignore them.

      • 1 Reply to ronharv
      • Please do not just assume it can always be ignored. Plenty of examples where edges did not work as projected.

        At one time LINE hedge liquids production with oil futures. It do not work out across the industry.

        LINE keeps it simple. I believe management can be trusted. If these conditions are not met nothing can be simply ignored or assumed. Last cycle many managements sold off hedges as their borrowing bases were tied to commodity prices. Like EROC that made the hedges not would they appeared to be.

        Ah Ron^3 just has to be Ron^3.

        70 first years of experience is never going to change.

    • Good Morning,

      You are correct. LINE hedges five years out so the mark to market GAAP accounting rules can produce huge gain and loss nonsense. As primary producer from well understood assets LINE has more control over production than nearly any other E&P. As LINE can produce to their hedge book it is accounting noise as they will deliver product to fulfill the contract.

      This board has some fine posters but it also has a core group here for their Environmental Progressive agenda always attempting to mislead.)

      LINE also uses a higher percentage of puts. This is less about upside participation and more about flexibility in real production growth. LINE sells natural gas production five years out and then rides the normal higher price slope of the futures market; contango, down. All other things constant the put price should be higher than the spot price.

      Futures contracts are an agreement to deliver product. While puts are a financial asset really based the price of the asset. It is possible that natural gas prices are such that LINE decides not to produce and book the gains on the puts.

      The key to assuming it is all phantom accounting is management is trust worthy. Management has to have an accurate production forecast and actually be hedging that forecast..So while I trust line I do not make the assumption for other EP or pipes without a proven reason to do so.

      Hope this helps.

    • I am going to allow our resident OLB the opportunity to answer your relevant question first.

      They claim expertise on the subject. If they do not respond or get it wrong I will add my two cents.

      But I do not claim to be smarter or wiser than my fellow Americans. Just offer ideas to consider and discuss.

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