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Northern Oil and Gas, Inc. Message Board

  • onginvestor onginvestor Feb 29, 2012 3:13 PM Flag

    Oil and gas derivatives accounting does more harm than good

    Accounting for derivatives hedges is a nightmare, and it causes MORE volatility in EPS. It also completely masks the entire point of being hedged: that is, the company's cash flows are more stable and predictable, but their reported earnings are just the opposite. Read this explanation and see the example as they are more relevant than ever...

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    • Earnings Report, Page 5, 1st paragraph, 4(rounded) million this years quarter compared to 2 million last years in taxes. That is nowhere near the profit on oil at 7.34 per barrel, and sold at 78.30, see page 4 of same report.

      If you are a company owner you couldn't buy losses like that to offset profits. Those losses go straight to the bottom line, and increase working capital by untold millions, since those hedging losses are just on paper, and the oil was still sold for a huge profit and cash flow. What a great tax shelter. They are beautiful thing. If you own a company.

      • 1 Reply to warrcee
      • IMHO, mark-to-market accounting for commodity hedges is not helpful. They were instituted to get better accounting for fixed assets like housing, commercial property etc. During the beginning of the housing bust -- banks and MBS holders were in denial about value of underlying assets...

        Mark-to-market may help with tax deferals in an up market, but the opposite takes place when market prices drop below the hedges. So, it's just a needless distortion. It would be great if the basis for running a business was to profitably offer products and services that are valued by users not by accounting tricks to fudge the books.

        All the very best,

    • Not really it keeps them from paying income tax. Notice the statutory rate they say they would have to pay is not the rate they actually pay, due to hedging losses. The NOG statutory rate was 39% but they didn't pay anywhere near that due to the hedging losses. Plus they still sold the oil at a profit, which was offset by the hedging losses.

    • If you are on the wrong side of the hedge, yes.

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