Thursday, March 29, 2012

GMX Resources (GMXR) Hedges Oil and Gas Production

From the press release:

"GMX RESOURCES INC today announces that the Company has entered into agreements with two hedge providers to protect its cash flow on oil and natural gas production."
I would probably hedge oil production here, too. But not natural gas. Here are the prices they have locked in:
2012: April -- December: $2.60 Swap for 4.0 Bcf
2013: January -- December: $3.50 Swap for 4.2 Bcf
These swaps cover "a significant portion of [their] estimated production". Remember that Chesapeake, which is really probably the smartest player in the natural gas market, covered its hedges back in November. I don't think that going short natural gas (which is what a swap is) is the smart play when natural gas is at a record low and the oil/natural gas equivalent BTU spread is at a record high.

Ironically, the scariest part about being short GMXR equity as part of a capital structure arb was that there was some optionality on a natural gas recovery. By shorting natural gas, they have basically taken that possibility off the table.

3 comments:

Taylor Conant said...

I guess they figure NG is going to $0?

PD said...

it wont go to zero, but it may not go up for quite some time. it is really likely that prices stay low for several years. Many companies are entering into gas contracts a little above their marginal cost. The mechanics of the market are taht they can't afford to store it, and their is too much solution gas on the market. nothing is happening on the demand side, and republican states have a drill or lose 2012 expiry. Pickens has the ear of a lot of republicans and they are drilling for liquids and getting gas as a by product. remember natural gas used to be flared on the well site because it was useless unrefined gas. now it is called natural gas, and then they will strip the gas for liquids or condense them out as propane, butane, naptha, really nasty high heat value products. I have been looking at natural gas wells to buy. industry guys are like there has been so much structure shift in supply and demand has been fairly even to maybe negative.

CP said...

Maybe so. But, it definitely helps the arb.