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We Won't Hedge Without a Reason, Says W&T Exec.

With oil trading at more than an eight-to-one ratio to natural gas in the cash market, the gas industry has little to fear from fuel switching, at least for now, W&T CFO W. Reid Lea told NGI.

"I look at this level of pricing and I remember 1998 and 1999, and when you look at it through those optics I'm happy with the pricing. You continue to see a fairly large disparity between oil and gas that has not existed in quite a number of years. The fuel switching that was so common during the third and fourth quarter of last year has all but been put aside by now."

Lea will be one of several speakers addressing gas supply issues at GasMart 2006, May 3-5 in Denver. His panel also will include speakers from Maverick Oil and Gas, Suez LNG, and Anadarko Petroleum Corp.

For at least the next three to five years, gas prices won't be threatened by growing importation of liquefied natural gas (LNG), Lea said he believes. In fact, LNG and its attendant economics will create support for gas prices.

"Various studies that I've seen indicate that the hurdle price for those [LNG] terminals to operate is around $5, and that is, I guess, just the break-even on their capital costs. I believe in the short-term that is absolutely going to put a floor on the U.S. market, which is good for a domestic producer. The amount of LNG that's projected to come into the market as a percentage of total demand over the next several years is going to continue to be relatively small, so I don't foresee that it's going to have a negative impact on prices in that horizon."

Regardless what prices do, don't look for 22-year-old W&T to be hedging its production in the futures market, at least not as as a matter of standard practice. In order to secure financing for its acquisition of Kerr-McGee Inc.'s Gulf of Mexico properties, W&T hedged a portion of its production (see Daily GPI, Jan. 30). But hedging is the exception, not the rule.

"Our strategy has always been that hedging commodity prices is a tool and that you use a tool for a specific purpose," Lea said. "Our belief is that to simply go out and hedge without a specific financial or operational purpose is akin to just placing a bet. We are an E&P company. We're not an energy trader, and we don't speculate in energy and commodity prices."

Lea noted that the company benefited from robust commodity prices last year because of its exposure to the markets. "Would we hedge for something other than a transaction like we've got with Kerr-McGee? The answer is yes, if we had a specific reason. Let's say we are going to have significant capital expenditure to bring on a new prospect... that might be a specific instance operationally where we would execute a hedge."

Lea said Houston-based W&T expects its acquisition of the Kerr-McGee properties to close near the end of the current quarter or some time in the third. Progress has been delayed by regulatory activities at the Minerals Management Service, which, based in New Orleans, was hit hard during hurricane season. However, work is well under way to integrate the KMG assets. "We know how to do this integration pre-transaction," Lea said. "We have a very good working relationship with Kerr-McGee, and they are informing us of significant operational activities, and we also have personnel that meet with them on a weekly basis. There is a significant amount of integration that is going on right now."

Despite its name, W&T Offshore would not say no to domestic onshore E&P activity were the right opportunity to arise, Lea said. During its 22-year history, the company has been active onshore, although it is not so currently. "We're obviously bullish on the Gulf," Lea said. "At times the market undervalues Gulf of Mexico production because it's got such a short life. In my view that gives us less exposure to long-term prices than CBM [coalbed methane]. And in many ways I relate coalbed methane to a manufacturing operation more than exploration and production. While it's low risk, your rate of return is dictated by long-term prices and how many wells you're going to drill per year."

Nevertheless, Lea said he does expect unconventional onshore resources to play a larger role in the domestic supply picture. However, "at least for the last five or six years the rates of return available to us have been much better offshore."

For more information on GasMart, visit gasmart.com.

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