hedges.....how do they work again and how liquid are they
hedges.....how do they work again and how liquid are they
could you revisit that topic again re CPE hedges and if they wanted to get the cash now and is there a big penalty for cashing them in early...thanks
Re: hedges.....how do they work again and how liquid are the
All companies sell their produced oil, gas and NGLs into the physical market.
There are adjustments made for quality and regional differences. Physical oil sales are totally separate from the cash settlements on their hedges.
Hedges are just like Puts and Calls against an index. Callon has hedges tied to the WTI NYMEX futures contracts and to the Brent ICE futures contracts.
Callon has Swaps (Puts) tied to the WTI index on 1,522,700 barrels of Q1 oil ( 16,7333 BOPD) at $52.25/bbl.
So, if the WTI Index averaged $40/bbl during the first quarter, the counter-party to those Swaps would pay cash to Callon of 1,522,700 X $22.25 = $33,880,075.
Keep in mind that the January NYMEX contract was above $52.25/bbl so Callon had to pay the difference to the counter-party in January
and the NYMEX contracts for February and March were below $52.25/bbl, so the counter-party paid them. Hedges are settled monthly.
Callon also has 3-Way Collars where the counter-party's downside is limited to the delta between the "Long Put" and the "Short Put".
In Q1: Callon had 2,222,000 barrels (24,418 BOPD) hedged with collars that had $65.26 Ceiling, $55.44 Long Puts and $44.99 Short Puts.
So, for the Month of March when the NYMEX contract was under the $44.99 Short Put, the counter party would pay Callon (24,418 X 31 days) X ($55.44 - $44.99) = $7.910,211
Callon also has some hedges that lock in their differentials to an index.
When Callon reports financial results for a quarter, they break out cash settlements on their hedges (on row 33 of the forecast model) as "Realized gain or (loss) on derivatives". The mark-to-market adjustment is shown on row 34. The value of their hedges on the last day of each quarter are adjusted on the balance sheet. This is similar to how Calls and Puts are shown on the statement that you get from a broker.
In my forecast models, the oil prices shown for each quarter are my best guess of the actual cash that Callon will get for their production including the cash settlements on hedges and regional differentials. In Q4 Callon's realized oil price was $55.33/bbl, which was a lower than the physical selling price because they had to pay the counter-party $3,353,000 in Q4 (see row 33 on the forecast model).
Hedges are "derivatives" that can be purchased or sold at anytime. They have a "time value" in addition to the difference between the NYMEX contract oil price for the month and the strike price. If Callon wanted to lock in a price on more December oil, they could do it at close to the December WTI contract that is selling for $33.17/bbl today. This makes Callon's SWAPS for Q4 of $49.03/bbl extremely valuable.
For example:
If Callon believes that the price of oil will go up by year-end (or they just need cash today) they can monetize their hedges tied to the December 2020 WTI NYMEX contract
At the time of this post, the NYMEX WTI contract for December is trading for $33.17.
Callon's December Swaps are at $49.03 per bbl. Looking at today's oil price (say $25.03) they have a value of $24.00/bbl.
But the cash value would $49.03 less what the December NYMEX contract is trading for today; around $33.17.
So, net of transaction fees they should be able to monetize the their December Swaps for ($49.03 - $33.17) x 1,147,000 bbls = approx $18 million net of the time value discount.
I'm sure this is clear as mud. Just know that Callon's hedges are extremely valuable. They are going to report a HUGE mark-to-market gain on derivatives in the first quarter 10Q.
There are adjustments made for quality and regional differences. Physical oil sales are totally separate from the cash settlements on their hedges.
Hedges are just like Puts and Calls against an index. Callon has hedges tied to the WTI NYMEX futures contracts and to the Brent ICE futures contracts.
Callon has Swaps (Puts) tied to the WTI index on 1,522,700 barrels of Q1 oil ( 16,7333 BOPD) at $52.25/bbl.
So, if the WTI Index averaged $40/bbl during the first quarter, the counter-party to those Swaps would pay cash to Callon of 1,522,700 X $22.25 = $33,880,075.
Keep in mind that the January NYMEX contract was above $52.25/bbl so Callon had to pay the difference to the counter-party in January
and the NYMEX contracts for February and March were below $52.25/bbl, so the counter-party paid them. Hedges are settled monthly.
Callon also has 3-Way Collars where the counter-party's downside is limited to the delta between the "Long Put" and the "Short Put".
In Q1: Callon had 2,222,000 barrels (24,418 BOPD) hedged with collars that had $65.26 Ceiling, $55.44 Long Puts and $44.99 Short Puts.
So, for the Month of March when the NYMEX contract was under the $44.99 Short Put, the counter party would pay Callon (24,418 X 31 days) X ($55.44 - $44.99) = $7.910,211
Callon also has some hedges that lock in their differentials to an index.
When Callon reports financial results for a quarter, they break out cash settlements on their hedges (on row 33 of the forecast model) as "Realized gain or (loss) on derivatives". The mark-to-market adjustment is shown on row 34. The value of their hedges on the last day of each quarter are adjusted on the balance sheet. This is similar to how Calls and Puts are shown on the statement that you get from a broker.
In my forecast models, the oil prices shown for each quarter are my best guess of the actual cash that Callon will get for their production including the cash settlements on hedges and regional differentials. In Q4 Callon's realized oil price was $55.33/bbl, which was a lower than the physical selling price because they had to pay the counter-party $3,353,000 in Q4 (see row 33 on the forecast model).
Hedges are "derivatives" that can be purchased or sold at anytime. They have a "time value" in addition to the difference between the NYMEX contract oil price for the month and the strike price. If Callon wanted to lock in a price on more December oil, they could do it at close to the December WTI contract that is selling for $33.17/bbl today. This makes Callon's SWAPS for Q4 of $49.03/bbl extremely valuable.
For example:
If Callon believes that the price of oil will go up by year-end (or they just need cash today) they can monetize their hedges tied to the December 2020 WTI NYMEX contract
At the time of this post, the NYMEX WTI contract for December is trading for $33.17.
Callon's December Swaps are at $49.03 per bbl. Looking at today's oil price (say $25.03) they have a value of $24.00/bbl.
But the cash value would $49.03 less what the December NYMEX contract is trading for today; around $33.17.
So, net of transaction fees they should be able to monetize the their December Swaps for ($49.03 - $33.17) x 1,147,000 bbls = approx $18 million net of the time value discount.
I'm sure this is clear as mud. Just know that Callon's hedges are extremely valuable. They are going to report a HUGE mark-to-market gain on derivatives in the first quarter 10Q.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: hedges.....how do they work again and how liquid are the
Do you have any idea on how one might evaluate counter party risk for CPE?
With the big price drop many of them (whoever they are) might be in trouble.
With the big price drop many of them (whoever they are) might be in trouble.
Re: hedges.....how do they work again and how liquid are the
That is above my pay grade but I have been told that counter-party risk is much lower than it used to be. I will ask my contacts at Aegis Energy.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: hedges.....how do they work again and how liquid are the
From my friends at Aegis Energy:
"We have been receiving many questions around this as some clients have large Mark-to-Markets. In general, yes, default risk for these counterparties have gone up, but its still very small and they came up from near 0%. Bank’s don’t typically hold many of these positions on their books, they usually execute an offsetting position at the time of the trade. The more important question is do they have the cash to cover their clients redemptions if they chose to do so. I believe its our experience and stance that this shouldn’t be an issue."
MY 2-CENTS WORTH: Each time we have a big drop in commodity prices this issue is raised. I don't recall it ever being problem in the real world and I believe the banks and counter-parties are in much better shape today than they were in 2008.
"We have been receiving many questions around this as some clients have large Mark-to-Markets. In general, yes, default risk for these counterparties have gone up, but its still very small and they came up from near 0%. Bank’s don’t typically hold many of these positions on their books, they usually execute an offsetting position at the time of the trade. The more important question is do they have the cash to cover their clients redemptions if they chose to do so. I believe its our experience and stance that this shouldn’t be an issue."
MY 2-CENTS WORTH: Each time we have a big drop in commodity prices this issue is raised. I don't recall it ever being problem in the real world and I believe the banks and counter-parties are in much better shape today than they were in 2008.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group