Mark to Market Means Q3 Gains for the Oil Patch

With the close of the third quarter on Tuesday, some energy producers will actually show a benefit from the plunge in oil prices. Companies that hedge the majority of their oil and gas production will see sharp mark to market gains in the third quarter. Remember, during the third quarter the price of natural gas lost all of its meteoric second quarter gain and then some.

In addition, crude oil is once again in double digit territory, where it was in March. Among those that use extensive hedging, limited partnerships and heavily leveraged E&P names are prominent. These entities cannot take the risk of a downturn in the commodity market. These are the names that took outsized paper losses in Q2, and are now poised to bounce back. In some cases the non-cash gains will be eye opening.

As an example, look at BreitBurn Energy Partners LP (BBEP). Excluding the $319.4 million non-cash write-down in its derivatives portfolio, BreitBurn says it would have reported a $7.3 million adjusted net profit. This is a write-down equates to more than $6 per currently outstanding partnership unit. BreitBurn’s nat gas contracts for 2008 ($8.10) and 2009 ($8.17) that were badly out of the money on June 30, are now back in the money. In 2010 ($8.26) the contracts are at or below par, but contracts for 2011 ($9.13) and 2012 ($9.56) are above average futures prices. Bretiburn’s oil contracts average from $73.60 in ’08 to $102.27 in ’12. These remain a drag on the balance sheet but not nearly as much as on June 30 when oil traded over $140.

Q2 Derivative Losses Set Up Q3 Profits (millions)

Company	Symbol	Net Income	CF (Ops)	Derivative Loss (Non-Cash)
BreitBurn	BBEP	($286.20)	$40.30	($319.40)
Exco Resources	XCO	($204.80)	$312.70	($572.30)
Energy XXI	EXXI	$8.20	$150.20	($58.70)
Linn Energy	LINE	($712.10)	($0.60)	($773.40)

Disclosure: none

Comments

[NOWHEREMAN:]

thanks

2008 Sep 29 04:38 PM