EVEP reported a net loss of $31.6 million, or ($1.93) per basic and diluted weighted average unit outstanding, for the second quarter of 2009. Included in net income were $44.5 million of non-cash net unrealized losses on commodity and interest rate derivatives and $0.7 million of non-cash costs contained in general and administrative expenses. For the second quarter of 2008, net loss was $99.5 million, or ($6.58) per basic and diluted weighted average unit outstanding, which included $118.1 million of non-cash net unrealized losses on commodity derivatives and $0.8 million of non-cash costs contained in general and administrative expenses. For the first quarter of 2009, net income was $38.3 million, or $2.23 per basic and diluted weighted average unit outstanding, which included $26.7 million of non-cash net unrealized gains on commodity and interest rate derivatives.
The $44.5 million non-cash net unrealized losses on derivatives for the second quarter of 2009 was primarily due to the significant increase in future oil prices at June 30, 2009 as compared to those at March 31, 2009, partially offset by the decline in natural gas prices as of such dates, and the effect of such price changes on EVEP's commodity price hedges.
Call me names if you wish but explain how this is good! Or even not so bad?
EVEP has a portfolio of hedges they have locked in to market their product. Unlike our friends in the banking industry now, EV has to mark these to market for quarterly reporting purposes. So you end up with huge swings in "unrealized losses or gains" from quarter to quarter... as oil prices fall, they show large "unrealized gains" on the value of the hedges. As oil prices climb the value of those hedges falls (again "unrealized"), but for accounting purposes, they have to be reported. Their values are relative to where they locked the hedges in re: the price of oil and NG.
OK; I thank you all for explaining this. It still seems like their hedging was overdone or too generous if the net comes out to such a large net loss. I mean $2/sh! I guess I need to look at reports over a longer time to see if they average out.
The losses are non-cash losses on hedges, meaning the company didn't actually lose any money on them. The nominal value of the hedges rises or falls as the underlying commodity price rises and falls, but the profit from the hedge is locked in. That is what determines actually cash-flow, and what pays our distribution.
jr, do you see the word "non-cash" before "net unrealized losses" ? Do you know what that means? Apparently not. Let me explain.
Exploration and production MLPs like EVEP hedge their production with futures (derivatives). Why? Usually to protect their cashflow since the oil and gas markets are volatile. Many times their bankers make them hedge because the bankers want to be assured that the MLP is going to have consistent cashflow to pay their debt. The bankers don't want to lend them money when the price of oil or gas is high and then have the bottom drop out of it. Hedging is a good thing because it locks in the price they get for their production which also supports the distribution to unitholders.
The way the GAAP accounting generally works is that when prices rise, the hedges are not "worth" as much so they have to mark-to-market this decline in value through their income statement, but this should be offset by higher realized prices on the production they sold. Conversely, when prices fall, they get less for their sold production, but the hedges show gains in value. Of course, the prices of oil and nat gas have disconnected so they could have gains on nat gas hedges and losses on oil hedges since the price of oil increased while nat gas decreased.
If you are an investor in MLPs, I would suggest that you focus less on GAAP reported earnings and instead focus on Distributable Cashflow (DCF) since that is what's used to determine our distribution.
Hope this helps. I suspect you are trying to drive the price down with your hysterics so that you can pick up some units a little cheaper.