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ALBERTA NATURAL GAS

Sell Call Option

Description:

The seller of an Alberta natural gas call option gives the buyer the right, but not the obligation, to receive the future published Alberta index price from the seller and to pay them a negotiated fixed price. In return, the seller of the call option receives a premium from the buyer immediately. In the money call 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 receive an immediate cash payment of $50,000 each month for the next 12 months and in exchange is satisfied to receive no more than $925,000 per month in future revenue. As a result, they sell a call option to ATB, whereby each month they give ATB the right, but not the obligation, to receive the Alberta monthly index price and to pay a fixed price of $9.25/GJ multiplied by 100,000 GJ’s. In return, the producer receives a premium of $0.50/GJ multiplied by $100,000 GJ’s from ATB.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

Selling a call option is an effective strategy when you want to receive an immediate cash payment and in exchange forgo the potential upside if prices increase beyond a certain negotiated amount. Using the same example as above, the following table and graph illustrate the impact of selling call options on potential revenue for the next 12 months. In this example, we assume that the average forward price of the Alberta index for the 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 the 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	$6.6M (100,000 GJ x $5.00 x 12mo. + net option value* (100,000 GJ x $0.50 x 12mo.))	$9.6M (100,000 GJ x $8.00 x 12mo. + net option value* (100,000 GJ x $0 x 12mo.))	$11.7M (100,000 GJ x $11.50 x 12mo. + net option value* (100,000 GJ x ($1.75) 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