A mid-stream company wanted to hedge the next two years of NGL production from a recently purchased plant. Management did not perceive hedging with NGL swaps as an attractive strategy because they believed the forward curve was deeply discounted.
R^2 research quantified the discount, demonstrating that the NGL forward curve was trading 20% below its BTU-equivalent value. The Client was provided historical and statistical analysis that identified several alternative hedge strategies, their cost/benefit and suggestions on how they might best be implemented. R^2’s staff helped the Client to develop a hedge program that provided the price protection they required and maximized the present value of the production stream for this specific asset. A conventional hedge program would have locked in revenue estimates for the first 12 months at $50 million. The hedge program implemented by the Client locked in $58 million, increasing revenues by $8 million or 16%.
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