Hedging With Tlc

Hedging with TLC

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Market observations that influence the choice of hedge instruments and

timing.

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Appropriate and Effective Hedging

Each firm has its own mix of risks, risk tolerance and access to credit for hedging.

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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.

Market Opportunities

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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

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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?


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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.

Natural Gas

43 WEEK DOWNTREND

8

11

19

18

4

4

2?

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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.

Good location at +2 S.D.

Avoid hedging here

and use puts if you do

Natural Gas

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Narrow Put 3-ways

(more upside)

Wide Put 3-Ways

(less upside)

Producer Collars

Sell Swaps

(0% upside)Buy Puts

(100% upside)

Up

PRICE TREND

Down

Attractive PRICE LOCATION Unattractive

Producer Hedge Matrix

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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.

Winter Pivot (red) and trend indicator

Summer Pivot (red) and trend indicator

Market Control: Seasonal Pivots

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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.


Natural Gas: Knowing who has control provides a clue into how much time do you have to hedge.

Market Control: Price Development

SELLERS IN CONTROL

BUYERS IN CONTROLNatural Gas

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Pulling It All Together

Prompt natural gas has resumed the downtrend in neutral territory.

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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.

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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?


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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.

Crude Oil

33 WEEK DOWNTREND

17

3

9

3

4

6

4

4

11

6

2

3

2?

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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

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Narrow Put 3-ways

(more upside)

Wide Put 3-Ways

(less upside)

Producer Collars

Sell Swaps

(0% upside)Buy Puts

(100% upside)

Up

PRICE TREND

Down

Attractive PRICE LOCATION Unattractive

Producer Hedge Matrix

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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.

Winter Pivot (red) and trend indicators

Summer Pivot (red) and trend indicator


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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.


Crude Oil: Knowing who has control provides a clue into how much time do you have to hedge.

Market Control: Price Development

SELLERS IN CONTROL

BUYERS IN CONTROLCrude Oil

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Prompt crude oil was rejected above the summer pivot range and has entered into a downtrend with prices between the neutral and buy zones.

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2012 swaps at $83.54 are chopping sideways. Perhaps sellers are in control. Location is at the low end of the neutral zone.

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Relative Value ReportDeveloping strategies that improve performance and profitability

December 31, 2009 e-mail: [email protected]

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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.

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.

Perspectives on the BP Spill

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Hedging With Tlc

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