When Oil & Gas Hedging Pays Off (EAC)

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Encore Acquisition Company (NYSE:EAC) announced this morning that it would cut its capital spending budget for 2009 by $150 million to $210 million. The company primarily buys and operates long-lived, slowly declining assets that offer continuing profits at low cost. Encore couples that with an aggressive commodity hedging strategy.

That’s what’s interesting about today’s announcement. Encore included achartthat shows the value of its hedging portfolio at a range of pricingassumptions for crude oil and natural gas. If crude sells for around$40/barrel and natural gas at about $5/thousand cubic feet, Encore’shedges pay off more than $400 million net in the 2008 fourth quarter.

In the third quarter of 2008, Encore’s net income was just over $206million, including a gain in fair value on its derivatives of about$239 million. As commodity prices fall, Encore’s hedges pay better.Encore’s shares are up about 3% today.

Paul Ausick
January 13, 2009