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Stringent Hedge Requirements, Plus One Available Counterparty Exploiting their Pricing Power - A Nightmare for any Small Oil Producer
MARKETS: OIL AND GAS | COMMODITY: CRUDE OIL | CLIENT: PRIVATE EQUITY

Situation

This small oil producer needed to fulfill a stringent hedge requirement to hedge five years of future oil production, as part of their acquisition strategy. It was a smaller deal at around 5,000 bbls per day, as part of an asset-backed security.  On top of this challenge, there was only one available counterparty, and the small producer had no leverage in the negotiation. With their hands tied, they had to accept the counterparty’s quote, which was between $0.75 and $1 per barrel lower than the curve, depending on the tenor.   

 Stringent Hedge Requirements, Plus One Available Counterparty Exploiting their Pricing Power - A Nightmare for any Small Oil Producer

 

Solution

Frustrated, the producer turned to AEGIS for help. After hearing the producer’s story, we felt the urgent need to help them as the actions of the counterparty conflicted with one of AEGIS’ core values – we don’t tolerate a$$holes. In this case, we used our deep knowledge of the market to assess the reasonableness of the counterparty’s bids and reacted accordingly.  AEGIS has unparalleled visibility into the market, trading with over 30 financial counterparties and executing over half a million contracts totaling over $30 billion in notional value, last year alone.  We called the counterparty, and after a professional but somewhat tense conversation, the counterparty agreed to significantly improve their quote. 

 

 

 

Outcome

As a result, the customer achieved a price improvement of around $3 million compared to what would have occurred with the same bid-ask spread implied otherwise.   

This story reflects how a Strategic Hedge Advisor can save a producer millions of dollars, even with limited trading flexibility. AEGIS has a deep visibility into the market at any point, strong relationships with counterparties, and we don’t back out from a challenging conversation when needed.   

This has led to an even stronger reliance on AEGIS hedge analytics tools, such as our recommendation capabilities, and a high dependance on the research and market tracking tools available on the AEGIS Platform. 

Interested in discussing how we can help mitigate your price risk?

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This case study is not indicative of future performance or success. Commodity interest trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Hedge advisory services are performed by the registered commodity trading advisor AEGIS-CTA, LLC, a wholly-owned subsidiary of AEGIS Hedging Solutions, LLC. This case study is not required to be and has not been, filed with the Commodity Futures Trading Commission ("CFTC"). The CFTC does not pass upon the adequacy or accuracy of this commodity trading advisor disclosure. Consequently, the CFTC has not reviewed or approved this case study.

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