|
OUR SERVICES
DERIVATIVES
NYMEX NATURAL GAS
Fixed-Float Index Swap
Description:
The seller of a NYMEX fixed-float index swap receives a negotiated fixed price based on current forward NYMEX prices from the buyer, and in return agrees to pay the future settled NYMEX price to the buyer.The swap generally settles in U.S. dollars 5 days after the NYMEX contract expires, but the settlement day can be negotiated to match the cash flow from the physical sale of the natural gas.
Example
natural gas producer has a contract to sell 100,000 MMBtu’s each month at the Alberta montly index price. The producer wishes to guarantee their natural gas revenue from this volume for the next 12 months will be $875,000 per month plus the difference between NYMEX and the Alberta index price (i.e., Alberta basis). As a result, they enter into a fixed-float NYMEX swap with ATB whereby each month they receive a negotiated fixed price of $8.75/MMBtu multiplied by 100,000 MMBtu’s from ATB. In return, they agree to pay ATB the future settled NYMEX price multiplied by 100,000 MMBtu’s.
Risk Management Strategy
Entering into a NYMEX fixed-float index swap is an effective risk management strategy when you want to bring more certainty to future revenue, but wish to remain exposed to changes in the Alberta basis. In exchange for this certainty and eliminating the potential downside from falling NYMEX prices, you forfeit the potential upside from increasing NYMEX prices. Using the same example as above, the following table and graph illustrate the impact of a NYMEX fixed-float index swap hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price for next year for NYMEX is currently $8.75/MMBtu and ($0.75)/MMBtu for Alberta basis. In addition, we have determined based on historical volatility and the current forward curve that the 5% worst case for next year is that actual prices average $6.25/MMBtu for NYMEX and ($1.25)/MMBtu for Alberta basis; and the 5% best case is that actual prices average $12.00/MMBtu for NYMEX and ($0.50)/MMBtu for Alberta basis. In other words, there is a 90% probability that the average forward price for next year for NYMEX will be between $6.25/MMBtu and $12.00/MMBtu and between ($1.25) and ($0.50) for Alberta basis.
Impact of Hedging Strategies on Potential Revenue for the Next 12 months
| Hedging Strategy |
5% Worst Case Revenue |
Expected Revenue |
5% Best Case Revenue |
| No Hedges |
$6M
(100,000 MMBtu x $5.00 x 12mo.) |
$9.6M
(100,000 MMBtu x $8.00 x 12mo.) |
$13.8M
(100,000 MMBtu x $11.50 x 12mo.) |
Hedge 100%
of Volume |
$9M
(100,000 MMBtu x $8.75 x 12mo.
-100,000 MMBtu x $1.25 x 12mo.) |
$9.6M
(100,000 MMBtu x $8.75 x 12mo.
-100,000 MMBtu x $0.75 x 12mo.) |
$9.9M
(100,000 MMBtu x $8.75 x 12mo.
-100,000 MMBtu x $0.50 x 12mo.) |
Commonly used terms  (PDF - 472K)
|
403-974-3582
403-815-1911