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Benefits of Energy Price Stabilization

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Title: Benefits of Energy Price Stabilization


1
Benefits of Energy Price Stabilization
Not an official UNCTAD record
  • 8th Africa Oil Gas Trade and Finance Conference
  • Marrakech, April 28, 2004
  • Deutsche Bank

2
Contents
Section 1 Energy price stabilization 2 Benefit
s of Hedging in Structured Finance 3 Current
hedge environment 4 Credentials, Capabilities,
and Contacts
3
Energy Price StabilizationSection 1
4
Energy Price StabilizationOverview
  • Governments are affected by energy price
    movements through
  • Direct exposure oil exporting countries or
    countries with regulated domestic energy markets
  • Indirect exposure oil importing countries and
    countries with liberated internal energy market
  • Governments tend to manage this in various
    ways
  • Passive
  • Reactive through the creation of an energy fund
  • Proactive through the implementation of a macro
    risk management strategy

5
Energy Price StabilizationOverview
  • Passive at the mercy of the market
  • Reactive at the mercy of change in economic
    policy making and politicians
  • Proactive use price risk management tools to
    mitigate the impact of adverse energy price
    movements

6
Proactive Strategic Risk Management
  • Strategic objective classically is Management
    of Cash Flow uncertainty
  • Two-step process needed in risk management
  • Measure risk quantify how oil prices adversely
    impact cash flows
  • Change risk if risk tolerance exceeded, hedges
    can alter profile

7
Reasons to hedge academic financial theory
  • Pure Economists view (Modigiliani-Miller)
  • In perfect financial markets (absence of taxes,
    no transaction costs, constant investment and
    production policy , no bankruptcy costs, full and
    symmetric information amongst market
    participants) Financial structure (including
    hedging) is irrelevant to firms value.
  • Financial Economists reasons to hedge all focus
    on market imperfections
  • Cost of funds Optimization of investment policy
    / internally generated cash flow
  • Lowering probability of financial distress
  • Reduction of expected taxes

8
Local oil prices
  • Global nature of oil market will make any local
    pricing mechanism dependent on the international
    oil price
  • Even in local subsidized price environment,
    somebody (government) will ultimately carry
    international oil price risk

9
Benefits of Hedging in Structured FinanceSection
2
10
Transaction Diagram
11
Structured Finance Basic Considerations
  • Typically an issuance secured by future commodity
    receivables involves an issuer that generates
    offshore denominated receivables from
    sales/service provided to offshore customers
  • When analyzing the probability of timely payments
    of both interest and principal, the lenders and
    rating agencies will consider, specifically, the
    factors listed below
  • The Borrowers credit
  • The Borrowers ability to continue to provide
    services
  • The type and importance of the service provided
  • The nature of the receivables and payment terms
  • The size and maturity of the issue
  • The legal structure of the issue

12
Structured FinanceRisk Assessment
  • Typically these structures mitigates the
    following risks
  • Price risk The risk that adverse price
    movements will threaten the payments. The price
    risk is mitigated by the hedge
  • Delivery Risk The risk that the Borrower will
    not make the scheduled deliveries of natural gas
  • Currency control risk The risk that the Borrower
    will not have access to foreign currency to make
    scheduled debt service payments. This risk is
    mitigated by the pledge of offshore receivables
    to the lender
  • Credit Risk Risk that the Borrower will not be
    able to meet its debt payments
  • Sales risk The risk that the commodity produced
    is not sold. This is mitigated by the designation
    of approved buyers

13
Why Hedge Structured Finance Transactions
  • Commodity producers and consumers are both
    exposed to substantial risk should the price of
    their associated commodities move in an adverse
    direction
  • Therefore, using financial hedging tools the
    borrower can
  • Minimize debt service coverage ratios
  • Maximise borrowing leverage
  • Reduce risk associated with volatile commodity
    markets
  • Stabilise income stream
  • Allow for more predictable and accurate forward
    planning
  • Secure shareholder value
  • Any activity which minimises an inherent and
    volatile business risk is viewed favourably by
    lending institutions. Generally ratings agencies
    view energy risk management positively,
    especially when analysing cash flow volatility

The decision not to hedge is itself a
position taking or speculative view of the
market.
14
Current Hedge EnvironmentSection 3
15
Average 2004 Brent priceAnalysts forecasts range
and expected accuracy
  • Current average (Reuters Jan 2004 survey, spot
    price 31 USD/BBL) Brent forecast is 24.70 USD/BBL
  • Studying analyst performance over last 5 years
    shows systematically bearish mean-reversion
    based forecasts have underestimated realized
    prices by an average 25-35, imply a corrected
    32.40 USD/BBL Brent price

16
Credentials, Capabilities, and Contacts Section 4
17
Example Publications
  • Daily
  • Coal Report
  • Energy Crack Report
  • Metals Daily
  • Natural Gas Report
  • Relative Value in Base Metals
  • Weekly/Monthly
  • Commodities Weekly
  • CFTC Commitment of Traders
  • Commodities Update
  • EIA Weekly Outlook
  • EIA Weekly Recap
  • Energy Fundamentals Monthly

18
Commodity Credentials Energy
  • Energy
  • Global crude and oil product market maker
  • 24 hour trading capability
  • Regional natural gas market maker
  • Regional electricity market maker
  • Swaps and options capabilities

Crude Oil WTI Brent (IPE) Dated
Brent Dubai Tapis Japanese Crude
Cocktail Other Grades by agreement
Refined Products Jet Fuel Gasoil /
Diesel Fuel Oil Gasoline Naphtha
LPG Tenor Crude Oil Up to 10 yrs
Refined Products Up to 5 yrs
Natural Gas US Natural Gas NYMEX and Basis
Winner
European Power and Natural Gas U.K. Based Trading
Energy/
Commodity
Derivatives House
of the Year
Correlation Trading European Weather
(Carbon Credits)
Coal Freight Swaps Options
19
Contacts
  • Structuring desk 44 207 545 7893
  • Sales desk 44 207 547 4305
  • Trading desk 44 207 547 3874

20
Disclaimer
  • The information herein is believed to be reliable
    and has been obtained from sources believed to be
    reliable, but we make no representation or
    warranty, express or implied, with respect to the
    fairness, correctness, accuracy, reasonableness
    or completeness of such information. In addition
    we have no obligation to update, modify or amend
    this communication or to otherwise notify a
    recipient in the event that any matter stated
    herein, or any opinion, projection, forecast or
    estimate set forth herein, changes or
    subsequently becomes inaccurate.
  • We are not acting and do not purport to act in
    any way as an advisor or in a fiduciary capacity.
    We therefore strongly suggest that recipients
    seek their own independent advice in relation to
    any investment, financial, legal, tax, accounting
    or regulatory issues discussed herein. Analyses
    and opinions contained herein may be based on
    assumptions that if altered can change the
    analyses or opinions expressed. Nothing contained
    herein shall constitute any representation or
    warranty as to future performance of any
    financial instrument, credit, currency rate or
    other market or economic measure. Furthermore,
    past performance is not necessarily indicative of
    future results.
  • This communication is provided for information
    purposes only. It is not an offer to sell, or a
    solicitation of an offer to buy, any security,
    nor to enter into any agreement or contract with
    Deutsche Bank AG or any affiliates. In addition,
    any subsequent offering will be at your request
    and will be subject to negotiation between us. It
    is not intended that any public offer will be
    made by us at any time, in respect of any
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