EnerJex Resources, Inc. announced that its wholly owned operating subsidiary, EnerJex Kansas, Inc., has entered into an agreement with Shell Trading (US) Company to sell all oil production beginning April 1, 2008 through September 30, 2009 to Shell. In addition, EnerJex has executed a fixed price swap with Shell for 130 barrels of oil per day (BOPD) of the company's crude oil production for the period beginning April 1, 2008 through September 30, 2009.
The price per barrel will be fixed at $96.90 per barrel at the wellhead. Volume of 130 barrels a day represents approximately 60% of EnerJex's current oil production on a net revenue basis. This specific transaction locks in approximately $6.8 million in gross revenue over the 18 month period.
At this time, all remaining production will be sold to Shell at current market prices defined as the average of the daily settlement price for light sweet crude oil reported by NYMEX for any given delivery month. All prices received for both fixed and spot contracts are before location basis differential, transportation costs, and oil quality adjustments.
EnerJex's CEO, Steve Cochennet, stated, "We are extremely pleased with the new relationship with Shell and the terms of this agreement. We have significantly improved the credit worthiness of our counterparty from a financial exposure perspective, and with our new relationship, provide more flexibility long term. In addition, the added financial stability of the swap provides us a solid revenue platform, and reduces the risks associated with the fluctuating price of oil. While mitigating the downside we can still realize upside should oil prices continue to increase as our remaining production will float with spot prices, which are currently very attractive."
Cochennet explained, "As we continue to develop our current properties and acquire additional leases, the production increases from these activities should reduce the fixed-price portion of our production. However, the Board of Directors has authorized a strategy to hedge up to 80% of current production on a net revenue basis. Seeking to reduce a portion of our exposure to unfavorable changes in oil prices, which are subject to significant and often volatile fluctuations, is part of our stated long term strategy. In this case, we are using fixed-price contracts."
In this case, the fixed-price contract is comprised of a fixed-price swap, which is a derivative instrument. The contract exchanges or "swaps" the floating or daily price or monthly price of a specified volume of oil over a specified period and for the specified volume over the same period. These types of contracts allow EnerJex to predict with greater certainty the effective oil prices to be received from a portion of our production, which benefit operating cash flows when market prices are less than the fixed prices provided in the contracts. Cochennet added, "We will regularly evaluate opportunities to manage the pricing of our production portfolio."
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