RE:RE:RE:RE:WCS almost $72There's actually a few things going on. If you look at the Income Statement, there are two numbers related to hedging:
- Realized Gain (Loss) on Commodity Contracts.
- Unrealized Gain (Loss) on Commodity Contracts
The "Realized Gain" number reflects commodity sales that actually took place during the quarter.The company is required to report Petroleum and Gas Revenues (top line on the statement) as if they received full price. They then report any difference due to hedging as part of the Realized Gain number. For example, if a company sold 1,000 Bbls during a quarter where the average price was $80/Bbl, they would record revenue of $80,000. However, if they had hedged all of that production at $70/Bbl, they would be required to show a Realized loss of $10,000. (Conversely, if they had hedged at $90 Bbl, they would show a gain of $10K).
The Unrealized Gain number is more problematic. Essentially Oil and Gas companies have to report as if they were investment houses. At the end of each quarter, they have to account for all of their future hedges as if they were going to sell them all on the Futures market that day. Consequently, futures contracts that are below the current Oil Price have to be recorded as a quarterly loss, while future contracts that are above the current price show up as a gain. The really crazy thing is that the company needs to restate the value of these contracts every quarter, so if they have hedges that go a year out, for example, they might find themselves having to report a loss from those contracts in one quarter (if oil pricess are up) and a gain from those same contracts in the next quarter (if oil prices go down), even though they have no intention of selling the contracts themselves and the hedges won't actually have any tangible consequence until the Oil and Gas is actually produced and sold.
This is just another reason why it's important to spend more time looking at the Cash Flow Statement (and why no one looks at earnings per share when evaluating this kind of company).
iwpete wrote: I've been asking the same question. It seems that the CFPS that was expected was, high $0.29 and average $0.27. It came in at $0.23. Why? From what I've read so far it's the higher price of oil. So how can that be? The higher the price of oil goes the more money they lose on hedges. So if oil were to go to $100 the hedges would really be under water. Now, I don't know if they really take loses or just report them on the books and keep the hedges till delivery. Still cash flow is impacted.
All the oil companies are in the same boat on this.