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Advisor

oil hedges, shades of Verasun

Scuttlebutt is that a lot of the frack wildcatters who are saying that they're hedged are in triple option collars with a cap near 100, hedge near 90 but risk re-opening fully in the 75 range.

 

In simple farm terms they sold an OTM call and a put to pay for an ATM put. If they did that at a wash, with oil at 55 they'd still be netting 70. Better than a kick in the butt but probably significantly beloe BE for some.

 

Bigger question would be margin calls on their cash flow- some statements have said they're hedged out through 2015. For a bunch of folks living off junk bond financing for daily operations that may be lethal.

 

As a wise old bird told me once, never say a market can't do something, as Verasun found out to the chagrin of their shareholders and a lot of farmers.

 

Nothing the matter with selling a put/call to finance another one as long as you know where you're going to blow out. Also all right to do it because you don't want to spend the money, but don't do it because you don't have the money to do it straight up.

 

 

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4 Replies
Advisor

Re: oil hedges, shades of Verasun

Acquainted with some guys who did the deal of their lifetime by selling their e-plant to Verasun for stock.

 

Never asked them if the stock had a calendar restriction on it or if they just got greedy.

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Highlighted
Advisor

Re: oil hedges, shades of Verasun

Correction.

 

Isn't going to be a full blown margin call if the construction is as I suggested- just no protection below about 70.

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Advisor

Re: oil hedges, shades of Verasun

http://remington-work.blogspot.com/2008/11/verasun-accumulator-contracts-backfired.html

 

A double whammy in Verasun's case- blew out of hedges at the top then were obligated to be buying corn on accumulator contracts as the market collapsed.

 

No doubt there are some drillers who have been enticed to enter into more exotic derivatives than the simple strategy I laid out. Obviously I couldn't say how pervasive it is.

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Senior Contributor

Re: oil hedges, shades of Verasun

Wasn't only e plants there were coops that almost went under in that time frame. Little fish playing in big waters on a big scale usually get eaten.

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