In the always-volatile energy industry, companies are constantly looking for ways to minimize risk and ensure profitability.
Hedges, collars, long-term contracts and other financial mechanisms often are used to help companies more accurately plan for their costs and revenues.
Some companies take the effort a step further.
Oklahoma City-based LSB Industries Inc. this week announced that it is getting into the natural gas production business.
The chemicals manufacturer and marketer bought a 7.7 percent stake in 57 existing and planned Marcellus Shale wells in Pennsylvania for $49 million, plus an expected $38 million to $40 million to develop the wells that have not yet been drilled.
Tony Shelby, LSB's chief financial officer, doesn't consider the deal “an acquisition of business.”
“This is a form of a hedge. It's in lieu of doing a derivative on the NYMEX (New York Mercantile Exchange) market. It's a pretty perfect hedge in the way we've calculated the costs of producing wells,” he said.
The natural gas interests were purchased by LSB's chemicals subsidiary, which each year buys more than 12 billion cubic feet of natural gas for use in its fertilizer plants in Oklahoma and Alabama.
LSB's effort is in line with a similar strategy followed earlier this year when Delta Air Lines bought the 185,000 gallon-per-day Trainer Refinery near Philadelphia from Phillips 66 for $150 million.
Delta executives think the airline can refine its own jet fuel for a less expensive and more consistent price than purchasing it on the open market.