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Hedging With Tlc

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  • 1. Hedging with TLC or Market observations that influence the choice of hedge instruments and timing. 1
  • 2. Appropriate and Effective Hedging Each firm has its own mix of risks, risk tolerance and access to credit for hedging. 2
  • 3. Market Opportunities Producers are price SENSITIVE: • Asset owners are “naturally long”. • Price determines revenue. • Revenue determines success. Yet producers….. • Hedge when they have to. • Often shop for hedges with their wallets open. • Choose hedge instruments as if each hedge was like every other hedge. • First concern is shortfalls in cash flow. • Second concern is giving away too much upside. 3
  • 4. Market Opportunities Hedging at higher prices is important to producers. Producers would prefer to hedge at this level. Can probably live with hedges here. But should avoid hedging down here 4
  • 5. Market Opportunities Making the most of opportunities. • TREND – Is price working for or against you? • LOCATION – Is price attractive or not? • CONTROL – How much time do you have? 5
  • 6. Trend Filters Natural Gas: If we get a weekly close above or below the prior 2-week range, it sets the trend. Trends don’t change until reversed. Trends have averaged 10.7 weeks since 2009. 43 WEEK DOWNTREND 18 4 11 4 2? 8 Natural Gas 19 6
  • 7. Location Filters Natural Gas: An early summer heat driven rally and lower volatility placed gas prices in the sell zone. Location: The upper third of the range between the Red -2 S.D. and blue +2 S.D. bands is our sell zone. The middle third is neutral and the lower third is the buy zone. Avoid hedging here and use puts if you do Good location at +2 S.D. Natural Gas 7
  • 8. Producer Hedge Matrix Wide Put 3-Ways Narrow Put 3-ways Up (less upside) (more upside) PRICE TREND Producer Collars Sell Swaps Buy Puts Down (0% upside) (100% upside) Attractive PRICE LOCATION Unattractive 8
  • 9. Market Control: Seasonal Pivots Natural Gas in Late 2007 & 2008 • The Winter Pivot and trend indicator identified strength through the first half of 2008. • The Summer Pivot and trend change identified the top in 2008. Summer Pivot (red) and trend indicator Winter Pivot (red) and trend indicator 9
  • 10. Market Control: Seasonal Pivots Natural Gas Summer Pivot • The September close at $4.924 turned the trend to up for one week. • Gas failed at the high of the Summer Pivot Range ($4.29 - $4.92). Trend turned to down. Sellers in control below $4.35 - $4.40. Weekly close above $5.01 reverses trend. 10
  • 11. Market Control: Price Development Natural Gas: Knowing who has control provides a clue into how much time do you have to hedge. SELLERS IN CONTROL BUYERS IN CONTROL Natural Gas 11
  • 12. Pulling It All Together Prompt natural gas has resumed the downtrend in neutral territory. 12
  • 13. Pulling It All Together Cal 2011 at $4.88 is in a downtrend controlled by sellers and in “buy” territory. The complication is that $4.90 is the midpoint of a $4 - $6 range. 13
  • 14. Market Opportunities Making the most of opportunities. • TREND – Is price working for or against you? • LOCATION – Is price attractive or not? • CONTROL – How much time do you have? 14
  • 15. Trend Filters Crude Oil: If we get a weekly close above or below the prior 2-week range, it sets the trend. Trends don’t change until reversed. Trends have averaged 6.4 weeks since 2009. 33 WEEK DOWNTREND 6 4 3 3 6 3 4 11 2? 4 2 9 Crude Oil 17 15
  • 16. Location Filters Crude Oil: Since the selloff in May, oil has struggled back into the neutral zone. Location: Poor fundamentals and/or a downtrend can make hedging in the neutral zone very attractive. Good location Crude Oil 16
  • 17. Producer Hedge Matrix Wide Put 3-Ways Narrow Put 3-ways Up (less upside) (more upside) PRICE TREND Producer Collars Sell Swaps Buy Puts Down (0% upside) (100% upside) Attractive PRICE LOCATION Unattractive 17
  • 18. Market Control: Seasonal Pivots Crude Oil in Late 2007 & 2008 • The Winter Pivot and trend indicator identified strength through the first half of 2008. • The Summer Pivot and trend change identified the top in 2008. Summer Pivot (red) and trend indicator Winter Pivot (red) and trend indicators 18
  • 19. Market Control: Seasonal Pivots Crude Oil Summer Pivot • We had two weekly closes above the summer pivot, but buyers ran out of bullets and prices moved lower. Trend was up for 2 weeks and failed. Sellers are in control below $76.50 - $78.50 Weekly close above $82.97 reverses trend. 19
  • 20. Market Control: Price Development Crude Oil: Knowing who has control provides a clue into how much time do you have to hedge. SELLERS IN CONTROL Crude Oil BUYERS IN CONTROL 20
  • 21. Pulling It All Together Prompt crude oil was rejected above the summer pivot range and has entered into a downtrend with prices between the neutral and buy zones. 21
  • 22. Pulling It All Together 2012 swaps at $83.54 are chopping sideways. Perhaps sellers are in control. Location is at the low end of the neutral zone. 22
  • 23. Relative Value Report Developing strategies that improve performance and profitability December 31, 2009 e-mail: info@riskedrevenue.com R^2 analysis is a tool, designed to provide assistance to companies that hedge. The assumptions used in R^2 analysis provide a practical framework from which a successful hedge program can be developed and maintained. R^2, while mathematically rigorous, is not a substitute for logic, common sense or the fiduciary responsibilities that drive hedging or any other business decisions. The information contained in this report is taken from sources the author believes to be reliable, but is not guaranteed as to the accuracy or completeness thereof and is reported for information purposes only. The recommendations contained in this report represent the opinions of the author. Such opinions are subject to change without notice. The author may or may not trade in commodities discussed in this report, taking positions similar or opposite to the recommendations discussed herein. Commodity trading involves risk and is not for everyone. 23
  • 24. Perspectives on the BP Spill BP spilled 5 million barrels: • 50,000 BPD X 100 days = 210 million gallons. Gulf of Mexico: • Surface area of 1.5 million square kilometers. • Loop Current has an average speed of 2.2 mph. • Holds 6.43 X 10^17 gallons of water. • Freshwater inflow of 280 trillion gallons per year. Impact: • 3.3 barrels per square kilometer, over 100 days. • Total dilution of oil is 0.33 parts per billion. (EPA regulations allow 6X more mercury in drinking water). • Freshwater inflow is 1.3 million times the oil spill.24