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Energy Hedge Fund Loses 22% in February

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  • Energy Hedge Fund Loses 22% in February

    You really have to work hard to lose money on energy when oil is over $100 and North American natural gas is finally responding to fundamentals that have been building for more than 2 years. Looks like someone else was betting on energy prices falling into a recession?

    Saracen Energy Hedge Fund Lost 22% in February on Gas Trades

    By Saijel Kishan
    March 7 (Bloomberg) -- Saracen Energy Partners LP, a Houston-based energy hedge fund, lost as much as 22 percent last month because of wrong-way bets on the price of U.S. natural gas, two investors said.

    The fund, founded by Neil Kelley, slumped as much as 32 percent in January and February, according to the investors who declined to be identified because the information is private. Messages left for Kelley through his assistant weren't returned. Allison Duensing, a spokeswoman for the fund, didn't respond to e-mails and messages left on her phone and with colleagues.
    `In general a drop of about 20 percent in a month is down to poor risk management,'' said Chris Goekjian, chief investment officer of London-based Altedge Capital U.K. Ltd., which invests in hedge funds. ``Funds shouldn't have such big positions, especially when liquidity is relatively low across most markets these days.'' Altedge isn't an investor in

    Saracen managed about $1.6 billion, according to a letter sent to investors last year. Kelley, who graduated from Massachusetts Institute of Technology in 1981, was a former vice chairman of Rotterdam-based commodity trading company Vitol Holding BV. Saracen, started four years ago, also trades oil, carbon emissions and coal.

    The fund bets on price differences between natural-gas futures, one of the investors said. Prices increased 16 percent last month after inventories fell. Futures are contracts for delivery of a security at a specified time in the future at an agreed price.

    Amaranth Loss
    An employee sitting at a desk in the reception area of the company's headquarters on the 13th floor of a building in Houston's Greenway Plaza complex, visited by Bloomberg News yesterday, said no one was available to respond to questions.

    Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.
    Amaranth Advisors LLC, which was based in Greenwich, Connecticut, collapsed after losing $6.6 billion in 2006 on natural-gas bets, the most ever by a hedge fund.

    Saracen's loss in February compares with an 11 percent return in the UBS Bloomberg CMCI Energy Index of seven energy futures. The HFRX Global Hedge Fund Index gained 1.8 percent, according to Chicago-based Hedge Fund Research Inc.

    The February loss was Saracen's biggest-ever monthly decline, according to the investors. The fund returned about 15 percent in 2007, following gains of about 18 percent in each of the previous two years, they said.
    Kelley's age was given as 48 in a December 2006 U.S. Securities and Exchange Commission filing.

  • #2
    Encana Loses $737 Million on Hedges

    Originally posted by GRG55 View Post
    You really have to work hard to lose money on energy when oil is over $100 and North American natural gas is finally responding to fundamentals that have been building for more than 2 years. Looks like someone else was betting on energy prices falling into a recession?...
    Looks like it's not just hedge funds that can lose tons of money in a rising market. Another example of a so called "risk management" department losing shareholders money year in and year out. Encana is one of the largest natural gas explorer/producers in North America. Encana is a favourite with Canadian institutional and pension investment managers, and there is no doubt it holds a wonderful portfolio of quality assets. However, it remains a company that I refuse to own because they have repeatedly and consistently capped their returns by their idiot hedging efforts.

    What is it that BMO's Don Coxe often says? "Those that know it best, like it least, because they've been hurt the most..."

    EnCana Q1 net income clipped down 81 per cent to $93M by $737M hedging loss

    Tue Apr 22, 9:12 AM
    The Canadian Press

    CALGARY - EnCana Corp. (TSX: ECA.TO) has reported an 81 per cent decline in first-quarter net income to US$93 million after an unrealized mark-to-market hedging loss of $737 million after tax.

    EnCana said Tuesday its operating profit for the quarter increased 23 per cent to $1.05 billion or $1.39 per share.

    January-March revenue was $5.34 billion, up 20 per cent from $4.44 billion a year earlier, powered by increased natural gas and liquids production and higher commodity prices.

    EnCana, which reports results in U.S. dollars, said the quarter's $93 million in net income, worth 12 cents per share, compared with a year-ago profit of $497 million, 64 cents per share.

    "These results continue to reinforce the strong value-generating capability of our sustainable, low-risk resource play strategy," stated CEO Randy Eresman.

    "Our resource plays continue to deliver excellent performance, driven by our industry-leading positions in plays such as the Deep Bossier formation of east Texas, the emerging Montney formation of Cutbank Ridge in northeast British Columbia and Jonah in Wyoming," he added.

    "We have built sizable land positions in various emerging shale plays and believe that over time they have the potential to add significant depth to our very strong portfolio of natural gas assets across the North American unconventional fairway."

    Capital investment in the quarter was up 25 per cent to $1.85 billion as EnCana drilled more deep wells.

    Realized natural gas prices were up 11 per cent to $8.02 per thousand cubic feet.

    Total natural gas production in the quarter increased 10 per cent to 3.7 billion cubic feet per day, while oil and natural gas liquids production rose five per cent to 137,000 barrels per day.

    At its downstream operations, EnCana said refined products were down five per cent to 435,000 barrels per day, due to a scheduled turnaround at its Wood River refinery in March.


    • #3
      Re: Encana Loses $737 Million on Hedges

      "$737M hedging loss"

      baaah! they weren't hedged... they were short. woops!


      • #4
        Re: Encana Loses $737 Million on Hedges

        Originally posted by metalman View Post
        "$737M hedging loss"

        baaah! they weren't hedged... they were short. woops!

        For those doing year-over-year comparisons don't forget that Encana's hedges lost $423 million for its shareholders in the first quarter of last year.

        Interviewed today, Encana CEO Randy Eresman's explanation for hedging is they were protecting their capital investment program from potential downside in price. Later in a print interview he was quoted as saying additional cash from rising natural gas prices would be used to retire debt or repurchase shares.

        1. The company is being run for the benefit of management and employees. Shareholders can go screw themselves.
        2. Any company that really believes the price of its product is about to decline should be cutting back on the capital being invested to create that product. Capping potential shareholder returns in order to keep on spending, on something it does not even believe in, is completely illogical. Unfortunately it's also all too common in the resource business. Run from any company that behaves this way. They do not deserve the use of your money.
        3. You can bet that a management team that thinks like this, is also rewarding itself for its brilliance by granting stock options like crazy. Using whatever is left of shareholder returns to buy back the stock is mostly a cover to avoid the dilution of overly-generous compensation from becoming too apparent.

        Be careful out there...