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Provident Energy Trust

Provident's commodity price risk management program utilizes derivative instruments to provide protection against lower commodity prices and margins.
The program protects a percentage of Provident's oil and natural gas production against a decline in commodity prices while, with some products, allowing the Trust to participate in a rising commodity price environment.

For the Midstream business unit, the program provides price stabilization and the protection of fractionation spread margins and a percentage of inventory values. Midstream production margins are affected by the spread between the purchase cost of natural gas and sales price of propane, butane and condensate. Market conditions have not provided sufficient or adequate opportunity to directly manage propane, butane and condensate prices over the longer term. Prices for propane, butane and condensate historically have correlated with prices for crude oil. As a consequence, Provident has entered into natural gas, crude oil and foreign exchange financial derivative contracts through March 2013 in order to protect operating margins in the Midstream business. Short term financial derivative instruments directly fixing propane, butane, natural gasoline and electricity prices have also been executed.

The Program also reduces foreign exchange risk resulting from the conversion of U.S. dollars into Canadian dollars, interest rate risk and fixes a portion of Provident's input costs.

The commodity price derivative instruments the Trust uses include puts, calls, costless collars, participating swaps and fixed price products that settle against indexed referenced pricing.

Hedge Execution Strategy

Business LineExposure

Execution Strategy

UpstreamProduction
  • Up to 30 month rolling term
  • Protect 15% to 70% of net production
  • Hedge products include puts and participating swaps
Midstream

Frac Spreads

Inventory

Buy/Sell

Power

  • Up to 30 month rolling term for frac spread exposure
  • Up to 12 month rolling term for product inventory
  • Target 50% to 80% of Buy/Sell volumes
  • Target 50% to 80% of frac spread  exposure
  • Target 50% to 80% of NGL inventory
  • Target 50% to 80% of physical product purchases
  • Hedge products include Puts, Fixed Price Swaps, Costless Collars and Participating Swaps
Corporate

Foreign Exchange

Interest Rates

  • Manage U.S. cash flows and support hedging of commodity prices
  • Hedge products include Fixed Price Swaps and Participating Swaps


Comparison of Hedge Products:

Fixed Price SwapsCostless CollarsPut OptionsParticipating Swaps
One PricePrice RangeFloor plus unlimited upsideFloor plus some upside
Downside protectedDownside protected (put strike)Downside protectedDownside protected
NO upside participationUpside limited (call strike)Upside unlimitedSome upside participation
No upfront costNo upfront costDefined, upfront costs, similar to buying insuranceNo upfront cost
Mark to Market credit exposure greatest  Participation levels determined by floor price and market price view 


Summary of Gross % Hedged as at December 31, 2009(1)
Upstream Production20102011201220132014

Crude Oil      Gross % Hedged

22%----

                      Weighted Average Floor Price

$53.75----

Natural Gas  Gross % Hedged

25%----

                      Weighted Average Floor Price

$4.30----
Midstream Frac Spread     

Hedged floor FRAC ratio ($Cdn WTI per bbl/AECO per gj)

9.39.69.99.9-
Gross % Hedged (2)58%46%37%3%-

(1) Oil & Gas Production assumed constant as at December 31, 2009.
(2) Margin protected between NGL (sale) and Natural Gas (buy). Due to market illiquidity Crude Oil is primarily used to hedge the NGL (sale).

A summary of Provident's risk management contracts as at December 31, 2009 is available here. 

 
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