RE:Re: they lose "real money" when netback is negativesoundandfury wrote: No no no........when the netback is negative they are insolvent..........anytime the realized loss on hedges is negative they are loseing money on their hedged production.........which in turn reduces the profit on the unhedged production to make up for the loss on its hedged production..........the only reason that the hedge loss is non cash is because the unhedged profit or netback is high enough to keep the adjusted funds flow netback above zero.......but make no mistake hedge loss money is still " REAL MONEY"
Negative netback doesn't mean a company is insolvent. It means they are losing money producing oil. If a company produces 20,000 barrels a day, produces it at 50 bucks a barrel, has half hedged at 75 and realizes 100 on the other half it plays out like this: a hedging loss is recorded on the hedged barrels. Fcf is 25 a barrel on the hedged, 50 bucks a barrel on the unhedged. Given they only report one fcf number, that number is divided by the barrels produced. Blended across the portfolio ya sure there is less profit on the unhedged, but that's in a 2 wrongs make a right kind of way.
hedging is a risk management strategy that limits upside revenue potential but hedging losses are not real cash flow losses resulting from producing a barrel