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Weather Forecasts and Hedging Activities Spur Uncertainty for Mineral Owners

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With the possibility of any real wintery conditions for the remainder of January apparently non-existent, the front month natural gas contract price is now trading in the low $2.70’s/MMBtu.  Advances in technology related to drilling and extraction are the impetus for this downward trend in pricing, which began back in mid-2008.  This downward trend has had a big impact on hedging activities for producers of all sizes.  Hedging is a financial arrangement whereby producers of natural resources are able to shield themselves from price volatility by locking in certain prices or price ranges.  In a high price environment, many hedge to try and lock in at higher than historical price ranges.   In a low pricing environment, many reduce their hedging activities or limit their hedging strategy to shorter time periods.  The rationale being, locking in at historically low prices prevents producers from taking advantage of rising prices.

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2 responses to “Weather Forecasts and Hedging Activities Spur Uncertainty for Mineral Owners”

  1. I am interested to know whether the natural gas royalties paid a royalty owner under a “proceeds” lease are calculated using the price per mcf paid by the buyer of the gas, or that price adjusted (either upward or downward) due to hedges.

    • Coyote Mineral Royalties says:

      Robert,

      Thanks for your comment. Traditionally, your royalty payment would exclude the benefits (and detriments) of hedging, unless there is specific language otherwise. Generally speaking, hedges are financial contracts between 2 parties only and are not tied to any specific geographic production, ie the owner of the hedge is bound by the financial contract regardless of whether they have any production or not. Said differently, the only way for you to potentially benefit from a hedge is to enter into one yourself. Operators traditionally do not extend the hedge to royalty owners, as they are not a party to the financial contract.

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