Commodity Hedging in Uncertain Times
Frank Verducci – BP Structured Products
January 14, 2009
Commodity Market Volatility
$14
$150
$13
$130
$12
$11
$110
$10
$9
$90
$8
$70
$7
$6
$50
$5
NYMEX Prompt Natural Gas
12/23/08
11/10/08
9/29/08
8/15/08
7/3/08
5/21/08
4/9/08
2/26/08
$30
1/11/08
$4
NYMEX Prompt WTI Crude
 2008 was a year of unprecedented volatility in the commodity markets
 Financial firms and institutional investors entered and exited the commodity space
with substantial $$$ and size
Credit Market Dislocation
1050
1050
Bank CDS Spreads
E&P CDS Spreads
900
900
750
750
MS
n09
Ja
08
N
-0
ct
O
ov
-
8
8
ug
A
l-0
Ju
-0
8
8
-0
M
ay
08
pr
-
n08
Ja
n09
Ja
-0
N
ov
8
O
ct
-0
-0
A
ug
Ju
l-0
-0
M
ay
A
pr
-0
08
b-
8
0
8
0
8
150
8
150
8
300
Fe
JPM
450
300
n08
C
600
A
450
GS
8
DVN
Fe
b0
XTO
Spread (bps)
PXD
600
Ja
Spread (bps)
CHK
 Credit markets came apart during fall 2008, with CDS spreads rising to record
levels
 Energy hedging is directly impacted by the credit markets
 Counterparty credit lines are set on the underlying CDS
Counterparty Risk Redefined
 Counterparty risk took on a new meaning in 2008
 Banks used to be wary of energy company counterparty risk
 Energy companies now have to be wary of financial counterparty risk
•
“Linn Energy Reports Termination of Commodity Hedges With Lehman. Linn Energy will take
all appropriate steps to recover the $68 million value of the terminated commodity derivative
contracts. Consequently, Linn Energy does not anticipate that the Lehman Brothers
bankruptcy is likely to have any material adverse effect upon the Company. “
•
“Breitburn Energy Partners Reports Limited Exposure to Lehman Brothers Holdings Inc. and
Its Affiliates”
 Numerous commercial and investment banks suffered substantial asset writedowns during 2008
 Standard & Poor’s downgraded 11 top global banks in December citing increased
industry risk and a deepening economic slowdown
Shrinking Number of Counterparties
 Numerous counterparties exited or reduced their presence in the commodity
markets
 JP Morgan / Bear Stearns Merger
 Lehman Brothers (Declared Bankruptcy)
 UBS (Closed Energy Commodities Business)
 Bank of America / Merrill Lynch Merger
 Wells Fargo / Wachovia Merger
 BNP Paribas / Fortis Merger
 Goldman Sachs / Morgan Stanley file for Bank Holding Company status
(uncertain effect on ability to maintain ownership of physical energy assets)
Hedging Markets Remain Viable
 Despite the shrinking number of counterparties in the commodity sector, energy
hedging markets remain open
 Depressed Natural Gas and Crude Oil forward pricing more of a factor than
commodity market liquidity
 Power Producers and Industrials taking advantage of term liquidity and depressed
prices
 E&P companies taking advantage of contango in the oil forward curve
Case Study – Secured Hedging Transactions
 Energy Company was looking for the ability to enter into long-dated commodity
hedges for significant volumes without tying up large amounts of capital
expenditure $$$ via posting of margin
 BP structured a hedging line of credit secured by the underlying assets of the
counterparty
 Counterparty required to maintain certain asset-coverage and hedge percentage
ratios
 Secured hedging line was structured to take advantage of the “right-way risk”
nature of commodity assets
 Counterparty was able to eliminate collateral posting requirements, thereby
maximizing their liquidity
 To date, BP has structured over $6 billion of secured hedging facilities in the
E&P, Midstream, and Power sectors
Strong Physical and Financial Platform
BP Corporation North America, Inc.
Financial highlights year 2008
Assets
$174 Billion
Annual Revenues
$145 Billion
Debt/Capital Ratio
10%
Credit Rating
AA
2008 - Top North American Marketers
Gas Daily ranking by wholesale physical volumes sold
North
Bcf/d* American Marketers by Volume
Ranking
1
2
4
5
6
7
8
9
10
Company
BP
ConocoPhillips
Constellation
Shell Energy
Chevron
Louis Dreyfus
Sempra (RBS Sempra)
Nexen
Lehman Brothers
Tenaska
2Q08
2Q07
30.3
14.2
14.2
13.7
8.3
7.9
7.7
7.3
5.8
5.1
25.9
13.5
8.2
12.8
8.8
5.2
8.9
4.9
4.5
(Bcf/d)
 Approximately 1,000 employees
 26 offices across North America
Strictly Confidential – for BP client use only
Leading Energy Derivative Provider
energy risk
energy risk
2008
#1 Natural Gas Dealer
2008
Oil and Products
House of the Year
Top 3 Rankings in 9 of 10
North America categories
energy risk
energy risk
2007
#2 Natural Gas Dealer
2006
#1 Natural Gas Dealer
Top 3 Rankings in 6 of 10
North America categories
Top 3 Rankings in 11 of 18
North America categories
Disclaimer
This information has been provided to you for informational purposes only. Unless specifically
stated otherwise, no information contained herein constitutes an offer or solicitation by or on
behalf of BP p.l.c. or any of its subsidiaries to enter into any of the risk management product
arrangements described. The actual terms and conditions of any contract for a specific
arrangement that may be entered into between you and BP p.l.c. or any of its subsidiaries may
differ from the arrangements described. Prior to entering into any risk management product
arrangement, you should obtain your own tax and other advice as risk management product
arrangements may expose you to inappropriate financial risk.