With new technologies like hydraulic fracturing and horizontal drilling unlocking natural gas from shale basins that were previously inaccessible, gas prices have plummeted over the past few years. Since 2008, the price of gas has fallen from a high above $13 per thousand cubic feet (Mcf) to today's price of $2.75 ... a 78% decline in a little more than four years.
That sell-off has been a thorn in the side of energy companies.
Aside from the effect on day-to-day profits, many companies have also been forced to make downward adjustments on the balance sheet. Just last quarter, BHP Billiton (NYSE: BHP) took a $2.8 billion impairment charge for gas assets in the Fayetteville Shale... BP plc (NYSE: BP) had to write off $2.11 billion... and the largest gas producer in Canada -- Encana Corp. (NYSE: ECA) -- had to write down $1.7 billion.
But I've found one energy company that is prospering, despite low natural gas prices. In fact, this company has navigated the difficult pricing environment so well that despite gas prices trading at a third of where they were back in 2007... its stock price is actually up 81% in the past five years.
What's behind this company's success? In short, it's the company's hedging strategy...
For those of you who are unfamiliar, a hedge is a lot like taking out an insurance policy on your home... You hope to never have to use it, but just in case something goes wrong, you're still able to protect your bigger investment.
Much like homeowners insurance, hedge contracts are essentially financial tools that enable you to pay a little to preserve a lot.
For example, an oil company might enter into contracts to sell 50% of its oil at $100 per barrel. If oil drops to $90, $80, or even lower, then the company is still guaranteed at least $100 a barrel on half of its oil production.
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