[rockdoc123]

Actually I believe it is a pretty good strategy. The company believes oil prices are at or close to bottom. As a consequence buying further hedges now for them doesn't make a lot of sense. They can sell the hedges they now have at a premium to what they paid for them, a relatively smart move if they don't need the capital immediately. And what did they do to guaranty they wouldn't need to use the hedges? They decreased their planned capital commitments.

Hedging is a tough business. You read about the cases where it worked for companies (eg. Encana was hedged all their production at $6/Mcf when gas prices had dropped to $4/Mcf) but seldom hear about those who lost money doing so. Over a number of years it usually works out that you are better off not to be hedged with one exception and that is when you have a large capital program that counts on being financed by oil/gas at a certain price. The old rule of thumb is you hedge enough to pay for your required capital outlay for the period of the hedge. In the case of an acquisition of a company you no doubt had a certain commodity price assumed in your acquisition economics. In this case it would make sense to hedge all of the newly purchased production at close to your price assumption until such time as the acquisition has paid out.

[shallow sand]

Anyone who hedged with anything other than puts from 2003-2007 really got hurt as prices skied and LOE did as well. Margin calls also had to hurt many during that time. I agree it is not easy. I've never bought anything but puts. Just an expensive form of insurance is the way I viewed it, and no margin calls.

However, it seems like if you are going to have a lot of debt that can only be paid back through net income from oil sales, you better have some price protection. Why not at least use some of that $433 million to buy some puts in 40-60 range. May avoid a BK in the event of a real dive and I assume puts in that ballpark are pretty cheap even now.

I always thought it risky to borrow much money to buy production without some price protection, and that strategy has been born out with the wild price swings since 1998. In fact, I assume many of the smaller oil companies' banks require hedging.

I actually looked at buying some production about the time the price peaked earlier this year but backed off primarily due to the forward strip being unfavorable and therefore puts being too expensive. Right now feeling pretty good about that decision. CLR has amassed a mountain of debt. They can't weather a long bear market like the Exxon's of the world.

However, I do admit Mr. Hamm has amassed quite a fortune and is smarter than I am. I remember him from his "Save Domestic Oil" days in the late 1990s. Would think he hasn't forgotten those times. I know I never will.