I will try to explain our hedge again, it helps me to try and understand it too :)
We have an oil colar hedge, that is we have purchased a put option with an exercise price of $60 and sold a call option with an exercise price of $102.90 for a total of 21,431 barrels and good untill dec 2011.
I think this means that if oil falls below $60 our put option will be making us money so that we achieve an efective sale price of $60bbl regardless of how low oil drops. From this you can assume $60 was choosen as its the minimum price to ensure a good profit.
Buying the put option costs money, so to offset this cost we sold an oil call option at $102.90. $102.90 would have been chosen based on achieving a decent premium price for the call option sale but without selling it too close to the money or the current oil price at the time of writting the option.
Because we have written an oil call option with an exercise price of $102.90 wti we are obliged to sell our oil at $102.90 to the option buyer if they decide to exercise and would do so if oil is above $102.
What i am not sure about is how this relates to ND sweet price which trades below wti and perhaps some offsets are applied.
I think this decision to hedge is a sound one and based on our qtly production figures and the new bakken wells, the hedge won't be in place for too long as it was only for 21431 barrells and in any case expires at the end of the year.
Also at the time of doing the hedge $102 wit oil probably seemed unlikely and so far wti hasn't been trading too much above that anyway.
It will be intetesting to see if they do another hedge when this one expires. With the Niobrarra flowing a hedge will have alot more implications.
It's on page 6 of the qtly if you want to check it out; http://www.samsonoilandgas.com.au/IRM/Company/ShowPage.aspx?CPID=1223&EID=56492104&PageName=December%202010%20Quarterly%20Report%20&%20Appendix%205B
SSN Price at posting:
19.0¢ Sentiment: Buy Disclosure: Held
