January Energy Hedging Q&A - Natural Gas, Diesel Fuel & Propane

Once again, it's time for the monthly energy hedging Q&A.  If you would like to pose a question for next month's Q&A, please contact us or leave a comment below.

We would need to know a lot more information but here's a list of few items that would drive our advice.

1. Do you have a risk management policy?  If so how does it address the hedge decision making process?  If you don't have a risk management policy, now is the time to develop one.
2. What are your cash flow needs for 2011?  What about 2012?
3. What is your cash and/or credit situation?  Do you have cash available to purchase put options?  Do you have credit established with a well capitalized counter-party?
4. What are you trying to accomplish by hedging? 

Once you answer these questions, then you can begin to determine a strategy.  In short, given the current price environment (12 month strip is currently $4.78/MMbtu), if we were forced to make a blanket suggestion, we would probably suggest that you purchase put options.  Then again, swaps or collars could make more sense, it all depends on your specific needs and goals.

We have a large trucking fleet and are looking to hedge our diesel fuel costs, what product(s) should we use to hedge our exposure?

The simpest and cleanest hedge for a fleet is a fuel surchage.  Better said, it would be ideal if you could pass your higher fuel costs on to your customers, either directly through a fuel surchage or indirectly by increasing your prices.

If neither of those options are possible, you can hedge diesel fuel by purchasing heating oil futures, diesel fuel swaps or options on either futures or swaps.  You'll also want to run a correlation analysis between your acutal costs and NYMEX heating oil futures and diesel fuel swaps (New York Harbor, Gulf Coast, Chicago, etc. to determine your exposure to basis risk and how you can hedge this risk, if applicable.

How can an manufacturing company hedge our exposure to rising propane prices?

There is an active, albeit small, market for both propane swaps and options.  Purchasing propane swaps, in conjunction with a solid propane supply agreement (which should eliminate or mitigate your exposure to basis risk), would allow you to establish a fixed price propane hedge.  You could also cap your propane exposure by purchasing a propane call option. 

We are in the oil and gas lending business and our team needs to develop a better understanding of oil and gas hedging, can you help?

Yes, we can and would be glad to help.  In fact we've recently conducted several on site seminars on oil and gas hedging for financial institutions.  Please give us a call if you would like to discuss how we can do something similar for you and your colleagues.

That's it for the January Q&A.  As always, don't hestiate to contact us if we can be of further assistance.