"Have you or any of your readers made sense out of the EVEP and LINE 1Q earnings reports and conference calls. I am particularly puzzled about the implications of the hedge losses. Thanks."
Those of you with any info please share it in the comments section. Just click and post. It would be a great help
Lunchtime and we're down to 328 on the MLP index as the bigger cap MLPS are all down fractionally. Terra Nitrogen is down 5 after being up to 92 and change...an almost non stop bounce from 77. EV Partners is down with Oneok LP and Markwest among the bigger losers today. Atlas Resources (ATN) is up 1 as the biggest winner today with Linn Energy up 83 cents and there are a few other fractional winners.
Never a dull moment in MLP land!
joseph cioffi's Source Page - Associated Content
2 comments:
Regarding the LINE and EVEP hedge "losses", I view it as an accounting anomaly. As I understand, it goes like this.
When someone like LINE buys a hedge, they are essentially putting a floor on the price of their production that they will eventually sell. If the price of the crude/gas goes up, the value of the hedge decreases. If prices go down, then the value of the hedge increases - i.e., the fact they could sell their product higher than market rates makes that hedge contract more valuable. Accounting rules dictate LINE to recognize these gains/losses, which are purely paper gains/losses.
The reality is that regardless of what the price of crude/gas does, LINE is going to sell their production. So when they actually sell the production, the losses/gains previously recorded are reversed.
So in fact, any losses recorded due to hedging is actually a good thing. It means that the price of LINE's production is actually going to be higher than the floor which had been set (and I would expect that future distributions are estimated based on this floor, rather than any assumption of higher prices).
So, that's the way I understand it. If anyone views it differently, please let me know.
I think that's the essence of it. It's like buying insurance...you hope you don't need it but it's there if you do. Almost all the MLPs play this game to drastically reduce commodity price exposure.
There is one exception that I'm aware of and that is WPZ. This is no doubt an MLP that marches to the beat of its own drummer. They have such a high coverage ratio on the distribution that they feel there is no need to hedge. In addition, they make no apologies for relying on WMB as their sugar-daddy provider of dropdown assets. This is contrary to the current style of investing in organic growth projects.
Post a Comment