...independent oil and gas companies have responded to the recent spikes and increased volatility in oil and natural gas prices by stepping up the practice of price hedging to shore up earnings and capital spending. Hedging can be a tricky practice to manage, and guessing wrong on price can do a lot of damage to a company's bottom line. The depth of the recent plunge in US gas prices caught virtually everyone by surprise, so some producers have succeeded nicely with what historically might have seemed high-priced hedges. Others missed a golden opportunity. But, in general, US independents are becoming more comfortable with the practice. While taking a breather from the wild price rollercoaster natural gas prices have been on of late, independents are devising new hedging strategies for coping with the vagaries of ever-more volatile commodity prices. Increased hedging US independents have watched natural gas prices drop from around $10/Mcf in December to about $3/Mcf in recent weeks. Oil prices also have fluctuated, as the world watches the Organization of Petroleum Countries work to maintain its targeted oil price band. Hedging is one strategy that independents use to try to lock in oil and gas prices as they strive for predictable cash flows to support exploration and development spending plans. "Companies have been doing more hedging on gas recently than they have done historically," said Robert Morris of Salomon Smith Barney. "Companies took advantage of high gas prices for two...
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...independent oil a gas exploration production company. Towards the late nineteen nineties and early twenty first century, Apache had completed several acquisitions. They included the following: Repsol which is in Egypt’s Western desert, Shell Overseas Holdings a partner of Repsol and Fletcher Challenge Energy. They combined for a total cost of $1billion. In an effort to minimize the volatility of the price of gas, Apache began a limited hedging program. The management team was aware of the underlying risks associated with hedging and they ultimately had to determine if they should continue hedging long term. If so, should they extend their current program beyond hedging the revenues from acquisitions. Within this case study, we will discuss major risks, how Apache Corporation is managing risks and whether or not they should be. We will also discuss how Apache could manage their risk as well as define what is the goal of hedging. Major Risks The biggest risk within this industry is the price of oil and gas. History has proven how volatile prices can be. Exhibit 9 indicated approximately a 70% range of price fluctuation between 1996 and 2000. The equation is relatively straight forward. When the prices are up, the industry is making money and is traditionally eager to hire new employees. When the prices are down, the industry is losing money and there is a strong likelihood that layoffs will follow. Apache, along with other independent oil and gas companies had become...
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...arising from daily operating activities, such as product delivery and oil drilling; as well as its financing activities, such as issuance of bonds and shares. Price Risk – Uncertainty about future profits and losses occurring from selling un-hedged oil & gas in the market. Hedging Risk – The Chance of foregoing any additional profits if prices were to increase dramatically under the collar strategy. Political Risk – Uncertainty stemming from investing internationally and the associated foreign policies in different countries. 2. When prices are up the firm has a higher income therefore will have larger cash flows directed towards investing and operating activities. However, when prices are down, the company tends to report lower (even negative) net income and have smaller cash flows going into operating and investing activities. Financing activities were kept fairly stable due to the required debt-to-capital ratio to keep good credit so cash flows had little effect on the financing activities. In addition, price fluctuations can also affect the amount of taxes Apache has to pay. Since when prices are low, the firm is able to defer its taxes whereas when their high, Apache has to pay up. Operating activities are affected when oil and gas prices fluctuate. Apache wishes to produce and sell as much as possible to profit when prices are high, which entails hiring a great deal of employees and specialists. However, when prices are low, Apache lays-off these excess employees to dampen their...
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...world's top independent oil and gas exploration and production companies. The journey to this point was fueled by Apache's contrarian approach to business. Apache Corporation is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. Apache’s mission is to grow a profitable global exploration and production company in a safe and environmentally responsible manner for the long-term benefit of our shareholders. The value’s Apache was founded upon — integrity, respect, individual initiative, innovation, and striving for excellence. Apache's continued growth and global expansion depend on these values to guide strategies, decisions and actions into the future. Apache had just closed on the acquisition on Repsol in Egypt’s Western desert and, along with its partner Shell Overseas Holdings, had also acquired Fletcher Challenge Energy, for a combined cost of $1 billion. The value of such acquisitions, however, depended in large part on the future prices of oil and gas. To decrease its exposure to oil and gas price volatility, Apache had begun a limited hedging program centered mostly on its recently acquired properties. After initiating a hedging strategy, Apache Corp. is interested in revisiting its decision to determine if hedging is value-adding. The issues under consideration in this case are how Apache initially decided to hedge against commodity price risk and how it implemented its hedging practice. 2. What are...
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...9-201-113 REV: AUGUST 27, 2001 D O LISA MEULBROEK Risk Management at Apache N Introduction O By March of 2001, managers at Apache Corporation, an independent oil and gas exploration and production company, had reason to be optimistic. While oil prices had softened somewhat recently, at $27 a barrel they were much higher than the pernicious levels of 1998, when oil bottomed out at $11 per barrel. Apache had just closed on the acquisition of Repsol in Egypt's Western desert and, along with its partner Shell Overseas Holdings, had also acquired Fletcher Challenge Energy, for a combined cost of $1 billion. The value of such acquisitions, however, depended in large part on the future prices of oil and gas. To decrease its exposure to oil and gas price volatility, Apache had begun a limited hedging program centered mostly on its recently acquired properties. Apache’s managers knew that hedging could create its own risks, and so it seemed prudent to re-evaluate the success of the new program. The decision facing Apache’s managers was whether the firm should continue hedging, and if so, should its current program be extended beyond hedging the revenues from acquisitions? T CO Apache Corporation PY Apache Corporation was founded in 1954 by Raymond Plank, its current Chairman and Chief Executive Officer. Mr. Plank’s son, Roger, was the company’s current CFO, but the company was not controlled by the Plank family, and in fact, officers and...
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...named Amaranth Advisors LLC lost $4.942 billion in natural gas futures trading and was forced to close their hedge fund. Although Amaranth Advisors was not exclusively an energy trading fund, the energy portion of their portfolio had slowly grown to represent 80% of the performance attribution of the fund. Their collapse was not entirely unforeseeable or unavoidable. Amaranth had amassed very large positions on both the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) in natural gas futures, swaps, and options. The trades consisted mainly of buying and selling natural gas futures contracts with a variety of maturity dates. Their trades were very risky from both a market risk perspective and a liquidity perspective. Background: Amaranth Advisors LLC: Amaranth was a multi-strategy hedge fund headquartered in Greenwich, Connecticut. Nicholas Maounis, a former convertible bond trader, founded Amaranth in September 2000.Amaranth’s initial assets under management of $600 million had grown to between $7.2 billion and $7.5 billion by the end of 2005, which translated to an average annual return of 15%, almost double the average return of other multi-strategy funds over the same period. The Primary strategies employed by the fund included convertible arbitrage, statistical arbitrage, energy trading, merger arbitrage, long/short trading and credit arbitrage. DAAS Capital Advisors: DAAS was a multi-strategy hedge fund, headquartered in the heart of Manhattan...
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...Canadian mining- Impact of cost inflation and volatility and the road ahead Introduction With a 9.8% share of Canada’s GDP, the mining sector is critical to the future of the Canadian economy (Deloitte Report). Unfortunately, rising cost inflation, unprecedented volatility in commodity and energy prices and a strong Canadian dollar have negatively impacted the performance of this sector over the last year. This report seeks to uncover the drivers behind cost inflation and evaluate the hedging strategies utilized by Canadian companies to mitigate volatility through a case study of Barrick Gold. We will also examine the impact of tightening margins on the capital expenditure decisions of this company. Part 1: Cost Inflation Cost inflation in the mining industry has been driven by increases in both Operational expenses and Capital expenditures. Operational expenses have been driven by three factors 1) Wage Increases 2) Energy Costs and 3) Supply cost increases. Wages in this industry have increased dramatically over the past 10 years and the Canadian mining industry now boasts the highest wages of all industrial sectors in Canada. The average weekly pay for a mining worker in 2011 was $1,436, which surpassed the earnings of workers in forestry, manufacturing, finance and construction by 47%, 46%, 35% and 32% respectively (DELOITTE REPORT) Source: Mining Association of Canada – 2012 Facts & Figures Report http://www.mining.ca/www/media_lib/MAC_Documents/P...
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...Hedging Jordanian Oil Purchases' Risk and Costs Using Oil Futures Contracts During 1998-2007 Dr. Asa'ad Hameed O. AL-ali ; Mohammed Murdi Al Rawad Abstract This study aims to investigate whether using futures contracts will reduce the Jordanian imported petroleum price risk and decrease the Jordanian petroleum purchases invoice. To achieve the objectives of this study, ten years-hedge simulation conducted on the real imported quantities to generate assumed comparable cases for the unhedged and hedged costs of the Jordanian monthly purchases. The study sample consisted of Jordanian monthly imported quantities of crude oil during the 1998-2007 period. Weekly spot prices of Saudi Arabian Light Crude and the daily futures prices of NYMEX Cushing Crude Oil Futures Contracts 1 (one month) and 4 (4 months) were also used. Constant cross hedge strategy conducted for hedging the Jordanian imported petroleum needs. The NYMEX Cushing Crude Oil Futures Contracts 1 and 4 employed to hedge the Saudi Arabian light crude oil over the study period as a proxy for the Jordanian petroleum purchases. The results demonstrate that the constant cross hedge strategy with the NYMEX oil futures contract 4 proved to be successful in hedging the price risk of the Jordanian imported petroleum and decreases the purchases invoice. While that of NYMEX oil futures contract 1 increases the price risk of the Jordanian imported petroleum, but at the same time decreased the purchases...
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...exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one particular strategy 2. What are the negatives to rolling a spread position? Ans: Negatives to rolling a spread position are: When rolling a spread position the investor expects the following months to which the contract was rolled over to be favourable and thus be able to unload its positions. But, if the market moves in a direction opposite to the one anticipated by the investor it can result in huge losses. Also, if the risk increases for a spread position with the increase in the leverage. In the case of Amaranth hedge fund, it had rolled its short positions prior to august into the next month, hoping that market conditions would change and enable it to unload its positions. There were now no more summer months into which it could roll these positions. By late August, with hurricane season almost over and natural gas supplies plentiful, it appeared likely there would be adequate supplies for the winter. The market fundamentals were strongly indicating that there the winter/summer price spreads should fall. This was disastrous for Amaranth, which was still holding large positions that it had obtained when...
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... This paper is written with a purpose to give a strategic advice to 3M’s current CFO D.W. Meline how to manage 3M’s future exposure of the foreign exchange rate risk. In doing so, the overall profile of the company is discussed; the current foreign exchange risk management instruments are described; and conclusions are drawn, followed by recommendations. International Risk Management: An Analysis of 3M’s Foreign Risk Management International Risk Management: An Analysis of 3M’s Foreign Risk Management Contents Executive Summary 3 Introduction 4 1. Description Historical Exchange Rates 6 2. Foreign Currency Exchange Rate Risk 10 2.1. Current Strategy to Manage Exchange Rate Risk 10 2.1.1. Cash Flow Hedging 10 2.1.2. Net investment hedging 13 2.2. Currency Translation Effects on Business Segments 14 3. Appreciating and Depreciation of Domestic Currency and Foreign Exchange Rate Risk Management 15 3.1. 3M’s Domestic and International Transactions 15 3.2. Appreciation of the Domestic Currency 17 3.3. Depreciation of the Domestic Currency 17 4. Implications of 3M’s Derivatives 18 4.1. Forward and Futures Contracts 18 4.2. Options 19 4.3....
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...SOUTHWEST AIRLINES FUEL HEDGING AND RELATIONS TO PROFITABILITY 1 Southwest Airlines Fuel Hedging and Relations to Profitability A Case Study in Cost-effective Fuel Management SOUTHWEST AIRLINES FUEL HEDGING AND RELATIONS TO PROFITABILITY 2 Abstract In order to stay airborne, a passenger airline has to consistently generate profits. Profits come only from paying passengers, hence all stratagems must be customer oriented. In a scenario where there are many airlines competing with each other, one way of attracting passengers is to keep the cost of flying low, while providing value for money. On the other hand, expenses must tightly controlled to reach and stay at the lowest possible. Certain expenses are unavoidable; however, one variable that can be kept low through decisive planning and foresight is the cost of fuel, which, at best, can be called volatile. A good way to achieve this is by hedging fuel cost, which is a complex, but rewarding process, as Southwest Airlines proves beyond doubt. SOUTHWEST AIRLINES FUEL HEDGING AND RELATIONS TO PROFITABILITY 3 Southwest Airlines Company: A Case Study in Managing the Cost of Aviation Fuel Introduction: Southwest Airlines Company, an American low-cost airline is the third largest airline in the world as well as the U.S.A. by the number of passenger aircraft among all of the world's commercial airlines (Arlene Fleming, About.com Guide; nationsonline.org), operating more than 540 Boeing 737 aircraft today between...
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...categories slowed from approximately 6% in 2012 to under 4% in 2013. The slowdown in category growth is expected to impact our near-term net revenue growth and we have reflected this in our Organic Net Revenue outlook for 2014. We believe the slowdown in category growth, particularly in emerging markets, is temporary, as we expect category growth to return to levels more in line with the expected growth of emerging markets and consumer spending. We continue to make investments in our brands and build strong routes to market to address the needs of consumers in emerging and developed markets. In doing so, we anticipate stimulating demand in the categories and growing our position in these markets. Volatility of Global Markets – Our growth strategy depends in part on our ability to expand our operations, particularly in emerging markets. Some of these markets have greater political and economic volatility and vulnerability to infrastructure and labor disruptions as we saw this past year in some of the markets in which we sell our products,...
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...|208083420 | |3/27/2012 | | | For the past three months we have been participating in a Stock-Trak Simulation exercise to experience what it takes to trade in the stock market. In this report, we will explain which strategies I chose to follow, which investments were the most and least successful to my portfolio and lastly, what advice we would give those who are looking to trade with real money. Investment Strategy and Selection The strategy I employed for our Stock-Trak simulation was to diversify our portfolio among different sectors, various stocks with relatively low risk, and stocks which were positively/negatively correlated with other securities in our portfolio. My goal was to make a gain of 10% return on our...
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...YORK UNIVERSITY STOCKTRAK REPORT ADMS 3531 N W2012 Eugene Myslinsky 208083420 3/27/2012 Stock-Track Report Eugene Myslinsky - 208083420 For the past three months we have been participating in a Stock-Trak Simulation exercise to experience what it takes to trade in the stock market. In this report, we will explain which strategies I chose to follow, which investments were the most and least successful to my portfolio and lastly, what advice we would give those who are looking to trade with real money. Investment Strategy and Selection The strategy I employed for our Stock-Trak simulation was to diversify our portfolio among different sectors, various stocks with relatively low risk, and stocks which were positively/negatively correlated with other securities in our portfolio. My goal was to make a gain of 10% return on our overall. The policies put in place to achieve my 10% goal are as follow: a) Trading with the exchange trend: Mathematical analysis has shown that equity price changes are mostly random with a small trend component, this is an important pillar of knowledge as this is the only strategy which will give positive results in the long run (usually seen within 4 weeks) b) Cut losses: When faced with a stock that has been underperforming beyond reasonable doubt and expectations it must be cut off in order to protect the return on my portfolio. c) Long Positions are kept until they stop performing well: I’ll hold onto our long or short positions as long as they...
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...P3 Describe how the environment and culture of another country affects a business operating internationally I am going to discuss how the environment and culture of India and China affect businesses operating internationally. I am going to use Tesco as an example. Environment: Both India and China have been named as countries with the highest expected growth in the next 50 years. India population – 1.1 billion, 1.3 billion. India is democratic, China is communist. (Businesses in India have freedom of speech and the way they operate their business while business operations in China are very limited by the Government) China is strong in manufacturing while India is strong in services and Information Technology. Strengths of China = Weaknesses of India Infrastructure in India: India’s road network is a barrier to business operations and has been holding industry back which is a challenge that Tesco would come across with if deciding to expand in India as it would make imports into India much more difficult, time and cost consuming. However Indian government has made it a priority to improve the country’s infrastructure and has pledged to build 14km of new roads in the nearer future. Infrastructure in China: China’s infrastructure is top class – one of the best in the world. China spends almost 50% of its GDP on investment towards their infrastructure which include; roads, bridges, trains, ports, technology etc. China has currently approved an estimated $156 billion dollar investment...
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