Its a good article and I lean more to 2 than 1. Mgmt teams nowadays are hyper sensitive to the external environment. However it is impractical to hedge out the curve. Many products are illiquid after a few months. Hedging the benchmark means taking on basis risk. Physical hedges maybe but that too is complicated in size longer dated.

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In theory: Energy producers owned first and foremost a physical call option on futures. So it's logical that as this option moves deeper into the money, that the extrinsic value premium in the p/pv 10 ratio should go down.

Now I agree with your argument in practice in terms of magnitude of the delta :)

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May 7, 2022·edited May 7, 2022

On the other hand... They haven't made biz plans yet to develop contingent resources that are not in the pv10 :)

Think about the magnitude of this discrepancy with OLD field life producers (ABEX timing, fcf op leverage, lifetime going up... Dcf upupup). Not to mention in-place physical infra to get nearby developments on stream with low costs and low lead time (to increase remaining lifetime of existing field even further). Useful in a shortage

Let's get in touch to exchange most interesting names here

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Look at something like Baytex. Very cheap. When you adjust for the hedges even more so.

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Nice post! Very interesting sectors.

I think the hedging results in a tad more risk than one might realize? If you would hedge your best estimate of production volumes per (whatever) period there is some risk from operations, ie a catastrophe with much lower production volumes.

Further, as we have seen recently, there can be big margin calls.

And, politics might limit future profits, as might cost inflation?

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margin calls are a huge issue, hedge for 5-10 years and if prices continue up you will continually need more cash to post margin long before you realize profits. Lenders cares about current cash flow, better have deep deep pockets to take on that risk.

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