MAY 9, 2011
Hedges Clip Gas Producers' Earnings
By MATT DAY, wsj.com
NEW YORK—Oil hedges are proving to be a drag on natural-gas companies' earnings.
Faced with historically low natural-gas prices, U.S. producers are pouring more money into their oil operations. But they missed the recent surge in oil prices beyond $100 a barrel because they are beholden to derivatives contracts that locked in sale prices in the $70s and $80s. At those prices, the gas companies' new oil reserves provide a steady flow of cash to pay for more drilling, rather than the booming profits many oil producers are enjoying right now.
Chesapeake Energy Corp. on Monday reported "unrealized" derivatives losses of $725 million during the first quarter, swinging the Oklahoma City company's earnings to a $205 million loss. Clayton Williams Energy said a $46.3 million loss on derivatives turned its results negative as well, selling its oil for an average $7.54 below the market price.
"This is one of those times I'm glad [CEO and founder] Clayton [Williams] owns 51% of the company," Chief Operating Officer Mel Riggs joked during an investor conference last month. "Because we'd probably be fired for that."
FULL ARTICLE: http://online.wsj.com/article/SB10001424052748703859304576307043090503266.html?mod=WSJ_hp_LEFTWhatsNewsCollection
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