Without seeing exactly what form SNDE hedges are, its easy to make a mistake.
In general, Swaps are cash settled and its simply a swap of cash flows between a fixed price (the swap price) and the variable price (the index). Does not look like SNDE has any of these.
Options. A commodity option is a little different to Put/Call options on a stock. The Option is allows the holder to exercise his option over the underlying security, which for oil is not actually physical oil per se. The underlying security of the option is a Futures Contract. So while you may well be long/short on the put/call option this actually means you are long/short the Futures contract in reality.
AFAIK the "American Style" oil option is for physical settlement (i.e. for WTI it is delivery to Cushing for example). "European Style" is cash settled only and NYMEX is American Stye
Thus if you are:
1) Long Call Options .... after YOU exercise your option you are Long the Futures Contract (and if you do not want to take physical delivery ... such as if cant store oil at Cushing then you better not be hold this).
2) LONG PUT Options ... after YOU exercise your option you are now SHORT the Futures Contract (and this means you are obligated to deliver the physical oil to the Long counterparty. Does not have to be "your oil" and you could buy it in any form ... as long as it can be delivered via pipeline to Cushing per the physical delivery requirements of the futures contract).
3) SHORT CALL Options ... after SOMEONE exercises their option you are now SHORT the Futures Contract (meaning you sold a Futures contract as you wish to sell you physical oil)
4) Short Put Options .. after SOMEONE exercises their option you are now Long the Futures contract (meaning you want to take delivery of oil)
As a E&P Sundance would generally want to be selling the oil it produces. Sundance's hedges are:
That reads to me as they MAY have (a) Long Put Options with a $56.50 strike price and we paid a premium to the Put Seller to own this option .... now see (2) above ... when the oil price is below $56.50, SNDE would exercise its option, collect its cash & is Short the Futures contract and delivers oil to the owner of the Futures contract. This is the floor. When oil is above $56.50, SNDE does nothing and lets the contract simply expire
(b) Short Call Options with a $60.09 strike price. We would have received a premium from the Call buyer. Now we have no control over what happens next other than if the price of oil stays below $60.09 that the owner of the option lets it expire worthless. Assume for a moment that price of oil zooms to $70. Then owner of the Call Option would exercise this option on SNDE .... now see (3) above ... and being short the Futures SNDE would have to deliver physical oil (receive just $60 for it - our ceiling) to the counterparty who can sell it for $70
Those are the scenarios where SNDE has to physically deliver oil ... which is fine since we produce it. Now it we were shut-in and producing no oil we need to have a strategy to close out the obligations where we have to deliver on the futures contract. Since we are long Put options all we need to do is sell those options and collect our cash.
Does that cover the question? Always a little tricky matching up the long/short Put/Call with long/short Futures.
SEA Price at posting:
16.5¢ Sentiment: Hold Disclosure: Held
