Diversified Energy Share Discussion Threads

[pro_s2009] 09/8/2022 01:28

Chaps......I would suggest that you just agree to disagree and email the company for guidance.

The companies reply you can then post on here which will clarify for all.

Email send to [e-mail] with a cc to [e-mail]


Very simple to email them and ask them to explain the hedging in laymans terms to clarify. Just inform them on certain discussion boards there is confusion and disagreement on how the hedging works, and could they please clarify noting that their response will be posted on a public bulletin board.

[greygeorge] 09/8/2022 00:30

lord gnome, you really don't understand what you're posting, do you ?

[lord gnome] 08/8/2022 23:20

greygeorge et al. An illustration:

It is January, and Company A wants to hedge forward some of its December production to guarantee its income. It agrees with a hedging counter-party to hedge 100,000 barrels of oil for December production at the current market price - say $100 per barrel.
December comes and the price of oil is $100. The hedge expires and there is no cost and no profit to either party (other than the admin/insurance cost of the hedge).
If December comes and the price of the oil sold is just $50 then the hedging company pays Company A the difference, i.e. 100,000 X $50 = $5 millions. Company A gets its money thanks to the hedge.
If December comes and the price of the oil sold has increased to $150, then Company A sells the oil for $150 but must pay the excess to the hedging counter-party. In this scenario it is the hedging company that receives the 100,000 x $50 =$5 millions.
Are you with me so far? This is simple maths.
Company A is not trading oil (or gas) it is not trading futures, it is merely insuring its trading income by way of hedging. In DEC's case this keeps the banks happy and also the shareholders happy as it pretty much guarantees our dividends come what may.

Now for the difficult bit. Stay with me.

Mark to Market Situations.

The hedge is taken out in January, but prices can move about a bit. In June, when the company reports its half year figures, the price of oil has risen to $120. If this prevails until December, Company A will owe the hedging company 100,000 X $20 =$2 millions, when the oil is sold, being the excess price receivable over the hedging level. This is therefore a mark to market loss of $2 millions on the hedge and must be reported with the half year results (ring any bells?).
Come December, the price is still $120 per barrel. The oil is sold. The company keeps the $100 per barrel and the $20 goes to the hedge counter-party. The Mark to Market loss disappears and the hedge has been paid out from oil sale proceeds.
Now do you understand?
I have tried to keep this very simple for you. In reaity, DEC will have lots of hedges running at various future dates and for various amounts of production to ensure that income matches liabilities. It keeps the banks and shareholders happy.
We are insured when things turn bad, but we relinquish some of the upside when things go well.
If you still don't follow me, I give up. Good night and sleep well. Rusty knows what he is doing even if you don't.

[greygeorge] 08/8/2022 23:20

podgyted, all I've done is highlighted the ignorance and stupidity of a lot of posters on this board.

[podgyted] 08/8/2022 23:15

I do so love it when a poster of 3 months duration pronounces him/her/itself to be an expert.

Nuff said.

We disagree.

[greygeorge] 08/8/2022 23:06

I do so love it when an anonymous poster feels the need to state their qualifications and / or experience to other anonymous posters.

[podgyted] 08/8/2022 23:02

"It's the posters here who are clueless"

You came quickly up to speed in 3 months.

"I don't think you fully understand what you're posting" - possibly not, I'm just an retired FD with experience of using hedging.

[greygeorge] 08/8/2022 23:01

fred177, not quite. DEC produces gas which it sells, at a profit. It sells future production, at a fixed rate, at a profit margin they're happy with, and which the market is prepared to pay. This gives the company forward earnings vision that it can rely on. The buyers take on the risk of rising or falling prices in the future, when the gas id due to be delivered, they're either futures traders, or end-users, like big utilities or big industrial gas consumers (think steel companies).

DEC doesn't have to pay these traders, or the end users, anything, whether gas goes up or down in price. As long as it delivers the gas.

[woodhawk] 08/8/2022 22:52

Shame to see you go, Fred177. Better to get out if you don't understand what you've invested in. Better luck next time.

[fred177] 08/8/2022 22:50

I am a complete novice at this, but, I am assuming that DEC gets the gas away at the market price circa $8 dollars, they then have to pay of the insurance policy/hedge who gain the difference, lucky them ? WHICH SHOWS AS THE LOSS ?

[greygeorge] 08/8/2022 22:48

fred177, I think it's an ok company. It's the posters here who are clueless.

[greygeorge] 08/8/2022 22:44

podgyted, I don't think you fully understand what you're posting.

[fred177] 08/8/2022 22:43

Greygeorge you've convinced me to get out, im in profit so thats ok with me

[greygeorge] 08/8/2022 22:39

fred177, please, NEVER buy or sell based on what you read on a message board.

[fred177] 08/8/2022 22:35

I am out of my depth but in profit with a good yield. will sell up as I don't understand the hedging greygeorge and 1knocker seem very clued up

[greygeorge] 08/8/2022 22:34

Lord Gnome, would you please explain this statement to me.

'...The positions will unwind over time and money will be paid to the counter-parties as gas is sold at higher prices. DEC has however, had to make margin calls in real cash, reflecting just how much the hedging positions are ‘losing’...'

[podgyted] 08/8/2022 22:33

Strangely enough 1K LG does actually know what he's talking about.

Greygeorge

"podgyted, you too are confusing commodity production with commodity futures trading.

the only 'loss' incurred by DEC is the theoretical loss between what it ACTUALLY sold it's production at, as oppsed to what it COULD have got if it sold it into the post market each day the commodity was produced.

The 'financial instruments' you mention are of no concern in the real world to DEC, but to the parties, the 'commodity traders' who have already agreed to buy and sell the commodity between themselves and for eventual delivery to the end user."

FFS

If you actually read my post that was precisely what I was saying.

[greygeorge] 08/8/2022 22:16

1knocker, maybe lord gnome is right, and the rest of us are all wrong....Nah, just kidding, lol.

[1knocker] 08/8/2022 22:10

greygeorge, LG is the living embodiment of the axiom that 'it ain't what a man don't know as makes him a fool. its what he does know that ain't so'.

[greygeorge] 08/8/2022 21:50

lord gnome - Ok, whatever you say (-:

[lord gnome] 08/8/2022 21:48

Greygeorge - it is quite clear from your last post that you haven’t the faintest idea what hedging is or how it works, or how DEC uses it as part of it’s financial strategy. You are completely clueless and shouldn’t be let loose on the stock market. Your juvenile attempt at explanation merely shows what a fool you are.

[1knocker] 08/8/2022 20:54

Greygeorge, be grateful for such people!! You see the same names on many boards, always totally ignorant of the company and its sector. They might as well pick their investments with a pin, though I guess they probably follow tips, without sufficient knowledge to assess the merits of the tip. If someone tells them in print that it will double, or better still replicate the success of Amazon, in they pile. At the first sign of a small drop, they sell. In the case of a big drop they hold or double down, determined to get their money back. They are very useful. When the rest of us make a mistake, or an unforeseeable disaster occurs, they are there to buy our shares so that we can salvage something from the wreck and move on.

Better still, in the case of DEC. which is prone to scare stories once or twice a year, they are generally spooked, sell up. and give us an opportunity to top up at bargain prices!!