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
NYMEX CALENDAR WTI CRUDE OIL

Producer Participating Collar

Description:

A NYMEX calendar WTI crude oil participating collar is the combination of buying a crude oil put option, selling a crude oil call option and buying a further out of the money crude oil call option. The premium required for buying a participating collar will depend on the strike prices for each of the options and the related forward market prices for crude oil. In the money participating collars are automatically exercised and generally settle in U.S. dollars 5 days after the calendar month ends. However, both the premium and the option settlements may be deferred to match the cash flow from the physical sale of the crude oil.

Example

A crude oil producer has a contract to sell 10,000 barrels each month at the Calendar Month Average of the prompt contract daily settles for the NYMEX Light Sweet Crude Oil Contract (the “CMA”). The producer wants their crude oil revenue from this volume for the next 12 months to be at least $515,000 per month and in exchange will be satisfied to receive no more than $700,000 per month. However, the producer wants to participate in the upside above $78/barrel. As a result they enter into a participating collar with ATB. Each month they have the right, but not the obligation, to either receive a fixed price of $52.50/barrel and pay the CMA or to receive the CMA and pay a fixed price of $78/barrel multiplied by 10,000 barrels. In exchange for these options they pay ATB a premium of $1/barrel multiplied by 10,000 barrels and give ATB the option to receive the CMA and to pay a fixed price of $70/barrel multipied by 10,000 barrels.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

A participating collar is an effective risk management strategy when you want to eliminate the potential for a decline in revenue due to falling prices and in exchange are willing to forgo some of the potential upside if prices increase beyond a certain amount. Using the same example as above, the following table and graph illustrate the impact of a participating collar hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price for NYMEX for next year is currently $60/barrel. 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 $40/barrel and the 5% best case is that actual prices average $85/barrel. In other words, there is a 90% probability that the average forward price for NYMEX for next year will be between $40/barrel and $85/barrel.

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	$4.8M (10,000 Barrels x $40 x 12mo.)	$7.2M (10,000 Barrels x $60 x 12mo.)	$10.2M (10,000 Barrels x $85 x 12mo.)
Hedge 100% of Volume	$6.18M (10,000 barrels x $40 x 12mo. + net option value* (10,000 barrels x $11.50 x 12mo.))	$7.2M (10,000 barrels x $60 x 12mo. + net option value* (10,000 barrels x $0 x 12mo.))	$9.12M (10,000 barrels x $85 x 12mo. + net option value* (10,000 barrels x ($9) x 12mo.))

* Net option value is the expected value of the options bought less the original premium and expected value of the option sold. 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