Friday, September 5, 2008

Oil Company Hedging

"'Lord, give me just one more oil boom, and I promise I won't hedge it all away this time.' ... Yet [Newfield Exploration] reported a $244 million loss because of a 'net unrealized loss on commodity derivatives of $508 million' before taxes. ... Anadarko Petroleum ... has a similar story. Its derivatives losses ballooned to more than $1.6 billion before taxes, pulling net income down to a measly $23 million compared with more than $1.3 billion a year earlier. ... What Anadarko, Newfield and Noble did was use derivative investments such as swaps and options to lock in prices they received for their oil. ... But at a time when they should have been reveling in record profits, companies like Anadarko, Newfield and Noble traded away opportunity by entering into swap agreements and other derivatives investments, essentially losing the chance to benefit from higher prices. ... Once again, we see companies discussing earnings in terms of generally accepted accounting principles, which count the hedging losses, and 'non-GAAP' numbers that don't. Analysts play along, mostly because the companies tell them to", Loren Steffy at the Houston Chronicle, 15 August 2008.

Idiots! Commodity producers should ignore the Wall Street geniuses who peddle hedges. We, who buy commodity producers, don't want them to hedge anything! We buy them as inflation hedges, not hedge funds. All the commodity company managements that hedge should be fired.

1 comment:

Anonymous said...

Seems a little harsh to fire management for hedging. Hedging more than is needed to "run an orderly shop" could be looked down upon. However, companies are justified, in my opinion, in hedging enough production to have predictable cash flow. Thus allowing the company to keep hiring good people, drilling new wells, not issuing more debt than desired ...