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Breitburn Energy Partners LP Message Board

  • chuckjohnson89 chuckjohnson89 Mar 11, 2010 3:43 PM Flag

    unrealized derivative losses

    What's up with 55 million in unrealized derivative losses for the quarter? As I understand hedging in this industry, it is intended to reduce exposure to underlying commodity price fluctuations. A 55 million dollar loss seems excessive. I don't mean to imply that mgt is trading derivatives improperly, just trying to understand. Thanks for any insight, CJ

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    • Barring Armageddon, the 10% dist for the next 3 years is a sure thing. Or at least as sure as can get in financial investments.

      If the dist was $2/yr-share then the math would be sketchy around early 2012, but at $1.5 we are looking good.

      • 1 Reply to j_ripper199
      • ""Barring Armageddon, the 10% dist for the next 3 years is a sure thing. Or at least as sure as can get in financial investments.""

        Yes, but what concerns me is that the tax friendliness of oil & gas MLP, might be eliminated by Congress. If the distributions are not tax sheltered, then I think you will see an immediate drop in the stock price, similar to what happened to the Canroy's during the Halloween massacre a few years back.

    • Footnote (b) seems to be saying that had they not sold their hedges in 1/09 & 6/09 that they would have realized the gain on those hedges in Q 4 09 -under "Production,income statement and realized Price information" Nothing to be concerned about now.

    • Thanks for the info, seems my confusion was over the cost associated with purchasing the hedges as opposed to the net effect of the hedges with respect to today's oil/gas prices.

      Any thoughts on how well BBEP's hedging program stacks up against others in the field (LINE,EVEP,VNR, etc...)?

      I'm fairly new to this business model and trying to understand how this line item plays into the big picture. Thoughts on hedging vs. todays matrket price are welcome as well. CJ

    • Looking at earnings in a massively hedged company such as BBEP is a waste of time. Unrealized hedge losses don't cause an outlay cash requirement, but make the numbers look really bad.

      Cash flow metrics are the only thing that has any value when looking at BBEP or other MLPs. In BBEP's case it sits at a very healthy $11mil/month or $132/year.

      Even with increased Capex, we'll still look at something in the $125-$140 range for 2010 FCF and that's being conservative. At $1.50/unit and 53mil units, we still get $60 mil extra all remaining.

    • No;

      The losses are merely paper losses.

      when a company sells oil at a hedged price of say 80 and it should have been 85 then they have to recognize the loss of 5 it is really an opportunity loss.

      This is common when energy prices rise fast like we had seen in late 2009.

      If they ha dno hedges they would hav emade that much more money. Debt covenants however force many energy companyes ot hedge as a safe convervative predictor of cash flow.

      Hope this helps.

      • 1 Reply to ruthsimeone
      • Hi ruth,

        With all due respect, I believe you have quite a misconception of what hedging is all about and how it really works.

        They are actually playing the futures market as a hedge against price declines and it has nothing to do with the prices at which the sell their oil and gas.

        Unrecognized gains or losses simply mean the futures contract hasn't matured yet. When it does, cash will change hands between the parties! Not at all as it appears you believe it works.

        For example if they hedge 100% of their oil at $75.00 and oil is at $80 when the contract expires, BBEP will have to pay $5.00 in cash per barrel hedged. It is true that part of that may be offset by higher oil prices they sell their production at during the time of the contract, but, for example if oil stayed around $75.00 during most of the futures contract and then went up by $5.00 withing days of the end of the contract, BBEP will be out around $5.00 in cash per barrel on the contract which would not have been offset by the prices they received during the 3-6 months the contract existed. Understand?


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