The document discusses factors that producers should consider when choosing hedging strategies, including price trend, location within price ranges, and which market participants have price control. It emphasizes evaluating these factors using tools like trend indicators based on weekly price closes, defining sell/buy zones within a price range, and identifying seasonal pivot points and trend changes. The document provides examples applying these concepts to natural gas and crude oil markets. It stresses pulling together these different market observations to help time hedging opportunities.

1. Hedging with TLC
or
Market observations that influence the
choice of hedge instruments and
timing.
1

2. Appropriate and Effective Hedging
Each firm has its own mix of risks, risk tolerance
and access to credit for hedging.
2

3. Market Opportunities
Producers are price SENSITIVE:
• Asset owners are “naturally long”.
• Price determines revenue.
• Revenue determines success.
Yet producers…..
• Hedge when they have to.
• Often shop for hedges with their wallets open.
• Choose hedge instruments as if each hedge was
like every other hedge.
• First concern is shortfalls in cash flow.
• Second concern is giving away too much upside.
3

4. Market Opportunities
Hedging at higher prices is important to producers.
Producers would prefer to hedge at this level.
Can probably live with hedges here.
But should avoid hedging down here
4

5. Market Opportunities
Making the most of opportunities.
• TREND – Is price working for or against you?
• LOCATION – Is price attractive or not?
• CONTROL – How much time do you have?
5

6. Trend Filters
Natural Gas: If we get a weekly close above or below the
prior 2-week range, it sets the trend. Trends don’t change
until reversed. Trends have averaged 10.7 weeks since
2009.
43 WEEK DOWNTREND
18
4
11
4
2?
8
Natural Gas 19
6

7. Location Filters
Natural Gas: An early summer heat driven rally and lower
volatility placed gas prices in the sell zone.
Location: The upper third of the range between the Red -2
S.D. and blue +2 S.D. bands is our sell zone. The middle
third is neutral and the lower third is the buy zone.
Avoid hedging here
and use puts if you do
Good location at +2 S.D.
Natural Gas
7

8. Producer Hedge Matrix
Wide Put 3-Ways Narrow Put 3-ways
Up (less upside) (more upside)
PRICE TREND Producer Collars
Sell Swaps Buy Puts
Down (0% upside) (100% upside)
Attractive PRICE LOCATION Unattractive
8

9. Market Control: Seasonal Pivots
Natural Gas in Late 2007 & 2008
• The Winter Pivot and trend indicator identified strength through
the first half of 2008.
• The Summer Pivot and trend change identified the top in 2008.
Summer Pivot (red) and trend indicator
Winter Pivot (red) and trend indicator
9

10. Market Control: Seasonal Pivots
Natural Gas Summer Pivot
• The September close at $4.924 turned the trend to up for one week.
• Gas failed at the high of the Summer Pivot Range ($4.29 - $4.92).
Trend turned to down.
Sellers in control below $4.35 - $4.40.
Weekly close above $5.01 reverses trend.
10

11. Market Control: Price Development
Natural Gas: Knowing who has control provides a
clue into how much time do you have to hedge.
SELLERS IN CONTROL
BUYERS IN CONTROL
Natural Gas
11

12. Pulling It All Together
Prompt natural gas has resumed the downtrend in
neutral territory.
12

13. Pulling It All Together
Cal 2011 at $4.88 is in a downtrend controlled by
sellers and in “buy” territory. The complication is
that $4.90 is the midpoint of a $4 - $6 range.
13

14. Market Opportunities
Making the most of opportunities.
• TREND – Is price working for or against you?
• LOCATION – Is price attractive or not?
• CONTROL – How much time do you have?
14

15. Trend Filters
Crude Oil: If we get a weekly close above or below the
prior 2-week range, it sets the trend. Trends don’t change
until reversed. Trends have averaged 6.4 weeks since
2009.
33 WEEK DOWNTREND
6
4 3
3 6
3
4 11 2?
4 2
9
Crude Oil 17
15

16. Location Filters
Crude Oil: Since the selloff in May, oil has struggled back
into the neutral zone.
Location: Poor fundamentals and/or a downtrend can make
hedging in the neutral zone very attractive.
Good location
Crude Oil
16

17. Producer Hedge Matrix
Wide Put 3-Ways Narrow Put 3-ways
Up (less upside) (more upside)
PRICE TREND Producer Collars
Sell Swaps Buy Puts
Down (0% upside) (100% upside)
Attractive PRICE LOCATION Unattractive
17

18. Market Control: Seasonal Pivots
Crude Oil in Late 2007 & 2008
• The Winter Pivot and trend indicator identified strength through
the first half of 2008.
• The Summer Pivot and trend change identified the top in 2008.
Summer Pivot (red) and trend indicator
Winter Pivot (red) and trend indicators
18

19. Market Control: Seasonal Pivots
Crude Oil Summer Pivot
• We had two weekly closes above the summer pivot, but buyers ran out
of bullets and prices moved lower.
Trend was up for 2 weeks and failed.
Sellers are in control below $76.50 - $78.50
Weekly close above $82.97 reverses trend.
19

20. Market Control: Price Development
Crude Oil: Knowing who has control provides a clue
into how much time do you have to hedge.
SELLERS IN CONTROL
Crude Oil BUYERS IN CONTROL
20

21. Pulling It All Together
Prompt crude oil was rejected above the summer
pivot range and has entered into a downtrend with
prices between the neutral and buy zones.
21

22. Pulling It All Together
2012 swaps at $83.54 are chopping sideways.
Perhaps sellers are in control. Location is at the
low end of the neutral zone.
22

23. Relative Value Report
Developing strategies that improve performance and profitability
December 31, 2009 e-mail: info@riskedrevenue.com
R^2 analysis is a tool, designed to provide assistance to companies that hedge.
The assumptions used in R^2 analysis provide a practical framework from
which a successful hedge program can be developed and maintained. R^2, while
mathematically rigorous, is not a substitute for logic, common sense or the
fiduciary responsibilities that drive hedging or any other business decisions.
The information contained in this report is taken from sources the
author believes to be reliable, but is not guaranteed as to the accuracy or
completeness thereof and is reported for information purposes only. The
recommendations contained in this report represent the opinions of the author.
Such opinions are subject to change without notice. The author may or may not
trade in commodities discussed in this report, taking positions similar or
opposite to the recommendations discussed herein. Commodity trading involves
risk and is not for everyone.
23

24. Perspectives on the BP Spill
BP spilled 5 million barrels:
• 50,000 BPD X 100 days = 210 million gallons.
Gulf of Mexico:
• Surface area of 1.5 million square kilometers.
• Loop Current has an average speed of 2.2 mph.
• Holds 6.43 X 10^17 gallons of water.
• Freshwater inflow of 280 trillion gallons per year.
Impact:
• 3.3 barrels per square kilometer, over 100 days.
• Total dilution of oil is 0.33 parts per billion. (EPA
regulations allow 6X more mercury in drinking
water).
• Freshwater inflow is 1.3 million times the oil spill.24