When Oil & Gas Hedging Pays Off (EAC)

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By Douglas A. McIntyre Updated Published

Oil_well_imageEncore 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

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.

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