RE:Mark to marketThe answer to this question is in the MD&A posted on the Vermilion website. Anyone invested in the stock should be reading the MD&A.
https://www.vermilionenergy.com/files/Q3_2021_VET_MDA.pdf Look at page 18. In the chart at the top of the page you will see a line item for Unrealized Losses. $279m. UNREALIZED. What does that mean? Well, read further down the page and they tell you that as well.
"Unrealized gain or loss on derivative instruments Unrealized gain or loss on derivative instruments arise as a result of changes in forecasts for future prices and rates. As Vermilion uses derivative instruments to manage the commodity price exposure of our future crude oil and natural gas production, we will normally recognize unrealized gains on derivative instruments when future commodity price forecasts decline and vice-versa. " "For the three months ended September 30, 2021, we recognized a net unrealized loss on derivative instruments of $279.4 million. This consists of unrealized losses of $306.3 million on our European natural gas commodity derivative instruments and $7.7 million on our crude oil commodity derivative instruments, partially offset by unrealized gains of $20.9 million on our USD-to-CAD foreign exchange swaps, $7.5 million on our North American natural gas commodity derivative instruments and $6.5 million on our equity swaps. For the nine months ended September 30, 2021, we recognized a net unrealized loss on derivative instruments of $353.4 million. This consists of unrealized losses of $431.2 million on our European natural gas commodity derivative instruments, $8.7 million on our crude oil commodity derivative instruments, and $3.1 million on our North American natural gas commodity derivative instruments, partially offset by unrealized gains of $63.7 million on our USD-to-CAD foreign exchange swaps and $25.6 million on our equity swaps." This is how you lose $147m in a quarter. But you didn't really lose anything. It's unrealized.
So, what's an unrealized loss?
https://www.investopedia.com/ask/answers/04/021204.asp "Gains or losses are said to be "realized" when a stock (or other investment) that you own is actually sold. Unrealized gains and losses are also commonly known as "paper" profits or losses.
An unrealized loss occurs when a stock decreases after an investor buys it, but has yet to sell it. If a large loss remains unrealized, the investor is probably hoping the stock's fortunes will turn around and the stock's worth will increase past the price at which it was purchased. If the stock rises above the original purchase price, then the investor would have an unrealized gain for the time they hold onto the stock."
Vermilioin is required by regulation to do mark to mark on it's hedges as the value of those hedges IN THE FUTURE go up/down in value as the commodity price goes up/down. If the commodity is higher than the top price of the hedge, the hedge losses some value "if it was sold today". If the commodity comes back down in price prior to its expiry the hedge will the gain some value "if sold today". Of course, this is all paper gains and losses as those hedges 3/6/12 months out are not sold today. Hence the losses are PAPER LOSSES.
Oldnagger wrote: To the accountants and CPA's out there, Is mark to market accounting really necessary when a company such as VET produces and markets the very same fungible product that is being hedged ?
It would seem that VET's position is no different than a producer selling on a fixed price contract.
My further question would be, if mark to market is not necessary, then why is VET doing it ? It seems to me that the resulting accounting provisions only add to investor's confusion. While I can fully see the need for mark to market in a company that is merely speculating on a futures position without producing the underlying commodity, this is clearly not the case here.
Two other thoughts, would mark to market apply if the hedge book was positive ?
I do not see other producers in Canada (or even the USA ) using mark to market , Could it be a requirement imposed by the Europeans ?
Any light that can be shed on the subject would be enormously useful IMHO