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DERIVATIVES
ALBERTA NATURAL GAS

Buy Put Option

Description:

The buyer of an Alberta natural gas put option has the right, but not the obligation, to receive a negotiated fixed price from the seller and to pay them the future published Alberta index price. In return, the buyer of the put option pays a premium to the seller immediately. In the money put options are automatically exercised and generally settle 5 days after the index is published. However, both the premium and the option settlement may be deferred to match the cash flow from the physical sale of the natural gas.

Example

A natural gas producer has a contract to sell 100,000 GJ’s each month at the Alberta monthly index price. The producer wishes to guarantee their natural gas revenue from this volume for the next 12 months will be at least $650,000 per month. As a result, they purchase a put option from ATB, whereby each month they have the right, but not the obligation, to receive a fixed price of $7.00/GJ and pay the Alberta monthly index price multiplied by 100,000 GJ’s. In return, they agree to pay ATB a premium of $0.50/GJ multiplied by $100,000 GJ’s.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

Purchasing a put option is an effective risk management strategy when you want to eliminate the potential for a decline in revenue due to falling prices, but still retain most of the upside if prices increase. In exchange for eliminating the potential downside, you pay a premium to the seller of the option. Using the same example as above, the following table and graphy illustrate the impact of a put option hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price of the Alberta index for next year is currently $8.00/GJ. 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 $5.00/GJ and the 5% best case is that actual prices average $11.50/GJ. In other words, there is a 90% probability that the average forward price of the Alberta index for next year will be between $5.00/GJ and $11.50/GJ.

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 GJ x $5.00 x 12mo.)	$9.6M (100,000 GJ x $8.00 x 12mo.)	$13.8M (100,000 GJ x $11.50 x 12mo.)
Hedge 100% of Volume	$7.8M (100,000 GJ x $5.00 x 12mo. + net option value* (100,000 GJ x $1.50 x 12mo.))	$9.6M (100,000 GJ x $8.00 x 12mo. + net option value* (100,000 GJ x $0 x 12mo.))	$13.2M (100,000 GJ x $11.50 x 12mo. + net option value* (100,000 GJ x ($0.50) x 12mo.))

* Net option value is the original premium less the expected value of the option. The impact of the option is illustrative only.

Commonly used terms

(PDF - 472K)

To speak to our local traders directly, please contact:
	Rob Laird, Director	Rob Van Horne, Managing Director
	403-974-3582	403-974-3582
	403-815-1911	403-519-3950

	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960

	Derivative Settlements
	780-408-6456