Natural gas and oil prices are up, and while saying “we remain very bullish on the longer term outlook for natural gas prices over the next couple of years,” some producers are opting to be safe rather than sorry in the short term, increasing their hedges for 2002 over the last few weeks. Three companies — Energen Resources, Comstock Resources and Magnum Hunter Resources — announced new natural gas and oil hedges last week, taking advantage of price levels they had not expected to see and bringing volumes hedged in 2002 to between 23% and 70% of production.

It’s all about making sure they have the cash to continue drilling programs, the producers said. And while they are bullish for the long term, “we continue to be concerned with the amount of natural gas remaining in storage at the end of the winter season,” said Chris Tong, Magnum Hunter’s CFO. “In order to avoid the effects of a significant drop in natural gas prices that could occur this spring and early summer, we chose to lock in commodity hedges during the April through June 2002 period with prices that far exceeded our budget expectations.”

Magnum Hunter now has locked in prices for 70% of its natural gas and oil production through the rest of 2002. Energen has hedged approximately 38% of its gas production and 23% of its oil production for the year. Comstock said it has hedged about 45-50% of its April to October 2002 gas production to increase the predictability of its cash flow from operations in order to support its 2002 drilling program.

Comstock entered into price swaps covering 50 MMcf/d of its natural gas production at an average price of $3.46/Mcf. The price swaps will be settled using the closing index price for natural gas delivered to the Houston Ship Channel for 38.2 MMcf/d and the closing contact price for natural gas delivered to the Henry Hub on the New York Mercantile Exchange for 11.8 MMcf/d. Comstock Resources, based in Frisco, TX, operates primarily in Texas, Louisiana and the Gulf of Mexico.

“The recent improvement in natural gas prices has created a strategic opportunity for us to lock in almost half of our natural gas production from April to October this year at a price significantly above our previous expectations,” stated M. Jay Allison, Comstock’s chairman. “The hedge increases the predictability of our cash flow for this period, assuring that we will not have to reduce our planned 2002 drilling program and will allow us to either increase our spending for capital projects or reduce our debt this year.”

Energen hedges now are up to 17.3 Bcf of gas, or approximately 38% of its estimated gas production of 46 Bcf for the year. The Energen volumes are hedged at an average Nymex price of approximately $3.35/Mcf. A total of 750,000 bbl, or approximately 23% of its estimated oil production (including production from the pending acquisition of Permian Basin oil properties) of 3.2 million bbl, has been hedged at an average Nymex price of approximately $25.32/bbl. Realized prices will be lower than Nymex prices due to basis differences that vary from basin to basin.

As a result of a series of hedges announced over the last 10 days, the diversified energy company based in Birmingham, AL, is revising its earnings guidance to a range of $1.80 to $1.90 per diluted share in 2002, up from an estimate of $1.75 to $1.80 announced a little over two weeks ago.

As of March 8, the company said it had only 1.1 Bcf hedged at an average price of $4.15/Mcf and 150,000 bbl at $27.38 for 2002. At that time, it was estimated that for Energen Resources’ unhedged production, every 10-cent change in Nymex prices from $2.85/Mcf would have an estimated impact of $2.9 million or 9 cents per diluted share. With the new hedges the same change in gas prices would impact earnings by $1.7 million or 5 cents per diluted share. For oil, every $1 change in the average Nymex price of oil for calendar 2002 from the budget assumption of $23/bbl — together with a corresponding change in the price of natural gas liquids — is estimated to have a net income impact of $2.0 million, or 6 cents per diluted share.

Energen Resources has announced plans to spend approximately $75 million for development drilling and other exploitation activities in 2002, including $16 million for a coalbed methane (CBM) down-spacing program in Alabama’s Black Warrior Basin. The company also will invest some $5 million in exploration and related development. Lease operating expense in 2002 is expected to be approximately $1.14/Mcfe, while depreciation, depletion and amortization expense is estimated to be $0.97/Mcfe. Energen Resources’ current-year CBM production is expected to generate some $13.8 million of nonconventional fuels tax credits in 2002.

Magnum Hunter’s recent hedging of 25 MMcf/d was accomplished through a combination of fixed price swaps and cost-less collars for the period of April 1, 2002 through June 30, 2002. For the remainder of calendar year 2002, Magnum Hunter now has an average total of 111 MMcf/d hedged with a weighted average floor price of $3.33 per MMbtu and a weighted average ceiling price of $3.60 per MMbtu.

In addition, Magnum Hunter, based in Irving, TX, entered into new crude oil hedges on 3,000 barrels of crude oil per day for the period beginning April 1, 2002 through Dec. 31, 2002 with a combination of fixed price swaps and cost-less collars resulting in a weighted average floor price of $24.02 per barrel and a ceiling price of $25.18 per barrel. The company now has an average total of 8,500 barrels of crude oil per day hedged for the remainder of calendar 2002 with a weighted average floor price of $23.45 per barrel and a weighted average ceiling price of $25.85 per barrel. The company operates primarily in the Midcontinent, Permian Basin and Gulf Coast/Gulf of Mexico.

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