ATB Financial - Corporate Financial Services

About ATB Corporate Financial Services

Executive Team

Our Locations

Benefits of ATB Financial

Corporate Lending Solutions

Account & Deposit Management

Investment Solutions

Employee Services

Derivatives

OUR SERVICES
DERIVATIVES
ALBERTA NATURAL GAS

Producer 50% Participating Swap

Description:

An Alberta natural gas 50% participating swap is the combination of selling an Alberta natural gas fixed-float index swap and buying an Alberta natural gas call option. The premium that would have otherwise been paid for the call option is deducted from the market price of the fixed-float index swap. In the money call options are automatically excersized. The call option and the swap generally settle 5 days after the index is published, however, the settlement day can be negotiated to match the cash flow from the physical sale of the natural gas.

Example

A natural gas producer has a contract to sell 100,00 GJ’s each month at the Alberta monthly index price. The producer wishes to guarantee their natural gas revenue from this volume will be at least $750,000 per month, but they also wish to participate in half of any price increases above $7.50/GJ. As a result they enter into a 50% participating swap with ATB whereby if the Alberta montly index price is below $7.50/GJ they receive $7.50/GJ mulitpied by 100,000 GJ’s from ATB and in return pay ATB the Alberta monthly index price multiplied by 100,000 GJ’s. If the Alberta monthly index price is above $7.50/GJ they effectively receive $7.50/GJ multiplied by 50,000 GJ’s from ATB and in return pay ATB the Alberta monthly index price multiplied by 50,000 GJ’s.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

A 50% participating swap is an effective risk management strategy when you want to eliminate the potential for a decline in revenue due to falling prices, but still participate in some of the upside if prices increase beyond a certain amount. Using the same example as above, the following table and graph illustrate the impact of a 50% participating swap 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 the 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	$9M (100,000 GJ x $7.50 x 12mo. + net option value* (50,000 GJ x $0 x 12mo.))	$9.6M (100,000 GJ x $7.50 x 12mo. + net option value* (50,000 GJ x $1.00 x 12mo.))	$11.4M (100,000 GJ x $7.50 x 12mo. + net option value* (50,000 GJ x $4.00 x 12mo.))

* Net option value is the expected value of the call 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