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Commodity Hedging in Uncertain Times

Commodity Hedging in Uncertain Times . Frank Verducci – BP Structured Products January 14, 2009. Commodity Market Volatility. 2008 was a year of unprecedented volatility in the commodity markets

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Commodity Hedging in Uncertain Times

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  1. Commodity Hedging in Uncertain Times Frank Verducci – BP Structured Products January 14, 2009

  2. Commodity Market Volatility 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

  3. Credit Market Dislocation • 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 -3-

  4. 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 write-downs during 2008 • Standard & Poor’s downgraded 11 top global banks in December citing increased industry risk and a deepening economic slowdown -4-

  5. 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)

  6. 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 -6-

  7. 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

  8. Approximately 1,000 employees • 26 offices across North America BP Corporation North America, Inc. Financial highlights year 2008 Assets $174 Billion Annual Revenues $145 Billion Debt/Capital Ratio 10% Credit Rating AA Strong Physical and Financial Platform North American Marketers by Volume (Bcf/d) Strictly Confidential – for BP client use only -8-

  9. energy risk energy risk 2008 2008 #1 Natural Gas Dealer Oil and Products House of the Year Top 3 Rankings in 9 of 10 North America categories energy risk energy risk 2007 2006 #2 Natural Gas Dealer #1 Natural Gas Dealer Top 3 Rankings in 6 of 10 Top 3 Rankings in 11 of 18 North America categories North America categories Leading Energy Derivative Provider

  10. 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.

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