Vermilion Energy Inc. T.VET

Hedge Accounting

[Rational43]

This conversation was getting painful:

Hedged or not hedged, VET sells its product into the market, at the prevailing market price.  

The swaps are financial contracts, which settle on a cash for difference basis.swap WTI at $60, and it closes at $70, I pay $10 per barrel x the number of hedged barrels in cash to the holder of the contract.  Real cash, out the door each month -> these are the Realized Losses, and they are tax deductions, against the gains made on the market revenue realized.
The Calls and Puts are different, if I sell a call at $70, than the buyer of the call has the right to buy that oil at $70 from me at Options expiration (or before, depending on call option type).  In most cases, those are also settled for difference.  

Now, the big loss on the Income statement comes not from the Realized Losses, but from the unrealized losses on ALL THE FUTURE HEDGES ON THE BOOK, marked to market each quarter.

So, if a producer had 10 years worth of $50 oil swaps, and the quarter ended at $70, then not only the $20 per barrel loss realized in the Quarter, but the remaining 9.75 years of losses of $20 a barrel + time value would be an income statement hit, in that quarter.
Non cash hit.  If the price went back to the hedge price of $50 next quarter, than the entire 9.5 years of losses would reverse, and the producer would have a huge unrealized hedging gain in the quarter.  If prices stayed the same, than there would essentially be no additional hedge loss. 
The one quarter of losses would become realized, the remaining 9.5 years losses would be lower, leading to a gain in the Mark to Market position. 

For sophisticated investors unrealized heding losses are just noise.

[Oldnagger]

Is the Mark to Market calculation based on the prices in affect at the end of the quarter, or is it based on the forward curve existing at that time ? If it is the forward curve, I would be very skepticsl one way or the other of the calculation, particularly if it is based many months out !!

[Rational43]

Forward curve at the last day of the quarter sets the price.  

[sclarda]

This post has been removed in accordance with Community Policy

[CashGreenGold]

This post has been removed in accordance with Community Policy

[Quintessential1]

Yeah the kind of noise that shoves a stock's price down by 20%+ and counting. I guess the market doesn't have any sophisticated investors in it or in VET.

[CashGreenGold]

You remain the biggest idiot here...