Because natural gas storage was near a record level early this year and on concerns that the United States could be entering a recession, Devon Energy Corp. entered into natural gas and oil hedges for this year that cover 40% of its total forecasted production on an oil-equivalent basis. CEO J. Larry Nichols said last week the storage situation may have eased, but with two months remaining in the winter season, he said Devon remains concerned about gas price volatility.
Nichols discussed the hedges during a conference call Wednesday to discuss Devon's quarterly and year-end results (see related story). The hedging by Devon followed a similar path by Anadarko Petroleum Corp. and EOG Resources Inc. to protect cash flow through gas hedges (see related stories).
Devon's 2008 average volumes hedged are 948,210 MMBtu/d at an average floor price of $7.50, and a ceiling average of $9-10.25/MMBtu. The average weighted price for the year is $9.42/MMBtu on volume of 556,516 MMBtu. The weighted average price for the year is $8.24/MMBtu.
Nichols said Devon's gas hedges are "attractively priced," with the average swap price of $8.24/MMBtu and a floor of $7.50/MMBtu on gas collars for 2008. Gas prices, he said, are "at higher than average gas prices for any year in history, except for the one year 2005 when we had hurricanes. We think it's prudent [to have] hedges in 2008."
The "meaningful hedges...are based on several factors," Nichols told energy analysts. "The nature of our capital budget is such that we have shifted to longer-cycle projects and longer capital commitments...such as the Lower Tertiary [in the deepwater Gulf of Mexico]. These are projects that require continuing investment.
"When we initiated the hedging, gas storage was at near-record levels. Now it is closer to the five-year average, led by record withdrawals. This has lessened our concern, but we are still concerned with the gas price volatility that remains." Besides the unknowns about the weather, Nichols said Devon's hedges also would "address persistent concerns about the recession that may be affecting the U.S." Nichols said management was less concerned about gas storage at this point, but he added, "there's still two months of winter left..."
Devon's gas price hedges are composed of financial price collar contracts and price swap contracts. The price collar contracts set floor and ceiling prices for a portion of Devon's gas output; the swaps fix the price for a portion of output. Both the collars and the swaps are based on the New York Mercantile Exchange first-of-the-month Henry Hub prices. The quarterly hedges are detailed on the company's website, www.devonenergy.com.
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