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During 2007, through our treasury activities, we engaged
in the active management of investments in energy industry
securities traded on domestic and international securities
exchanges. During 2007, we held a daily weighted average
of approximately $8.8 million outstanding of notional value
in a combination of exchange-traded common stock and options
on futures contracts and common stocks. At December
31, 2007, we had closed out of all open exchange-traded options
and we had no notional value outstanding at year-end. In
2008, we have continued our trading activity and entered
into new positions in these financial instruments.
Common Stock and Futures Options
During the period ended December 31, 2007, we wrote exchange-traded
options on securities and futures contracts associated with
either the common stock of energy-related companies or price
protection for company related oil and gas production. The
options provide our counterparty with the right, but not
the obligation, to enter into a "long" position
in the underlying security or futures contract, (in the case
of a "call" option), or a "short" position
in the underlying security or futures contract, (in
the case of a "put" option), at
a fixed price up to a stated expiration date. During
the period ended December 31, 2007, we recognized net unrealized
and realized gains of approximately $862 thousand for the
writing of options and trading of common stocks. Also, related
to these trading activities, we received net cash proceeds
of $2.0 million upon entering into new trading positions
during the year.
Also during the year ended December 31, 2007, we entered
into exchange-traded options on futures contracts to provide
price protection for our oil and gas production. During 2007,
we recognized $182 thousand in net unrealized and realized
losses on these instruments.
As the writer of an option on a securities and/or futures
contract, however, we may be subject to initial margin requirements
in connection with the option and are exposed to potential
losses equal to the difference between the premium paid or
received for the writing of the option plus or minus the
option strike price and the current price of the underlying
security or futures contract. Options on securities and futures
contracts are traded on the same exchanges as the underlying
security and futures contracts, and may only be entered into
through brokers that are members of the relevant exchanges.
Positions in options on securities and futures contracts
are cleared through the relevant exchange clearinghouse,
in the same manner.
Monitoring the Portfolio
We monitor our portfolio on a daily basis
to verify that there is no market or liquidity exposure level
we consider not acceptable. We recalculate our estimates
of gross aggregate cash exposure on a daily basis so that
total notional value outstanding and cash on hand does not
exceed our current Board approved limit of $20 million. At
any time though, we may reduce our portfolio exposure by
selling or terminating our positions.
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