Trading Jenga: How to Stay Alive and Unwind Positions
The winding path of energy prices are never easy to predict, but key market changes, load usage, and infrastructure are easily seen with great software. This is required for daily oversight of large problems and the ability to trace the upward or downward commodity price and its percentage change. Twenty five percent decreases in commodity prices may impact the valuations of related infrastructure. This can include gas fired power plants, long-term transportation agreements, storage, midstream field gathering agreements after the initial contract term has expired, and general management agreements for the regional partnership managers.
This creates difficult legging out of positions for many in the middle of large assets bundles. Selling financial positions or removing them will not lower risk. This forces loss. It can be offset with other asset sales which are profitable. Position elimination may reduce volatility, but only after the hard fall with bankers and partners. These concepts may not apply to those assets or companies outside of the USA.
The shedding of long term transportation and storage agreements could take midstream assets owned by small companies to new lows for acquisition by larger well-funded companies. Write downs may be needed upon close of this situation. You may need to discuss with your financial partners why your trading stop losses did not cover this area of risk. Update key people of the nature of long term transportation, logistics, storage, and other related costs and the limited nature of financial trading positions to reduce loss.
Thirty-year contracts cannot easily be managed with financial positions other than derivatives and swaps. These can also be impacted by the credit of the partners. What happens when the natural gas basis differential for a long term trading partner falls by 64%? These situations may be very difficult to manage or predict.
Trading these tangible assets into another class of energy assets can delay or erase this requirement. Would Exxon, Spectra, Duke Energy, or Eversource Energy like your 20-year transportation agreements? Could Hydro Quebec or DTE Energy use your storage position for the upcoming decade? Can your Marcellus Shale position be swapped with Vitol, Cargill, Chevron, Kinder Morgan, Direct Energy, Fortress, or StatOil for a position in London Brent? Would your storage facility be perfect for Buckeye Partner’s terminal business? Look at the underlying issues and project the best outcome possible.
Long-term regional production trends push prices in ways that make leaders of Vitol, BP, Shell, Exxon, and very large trading floors look twice. Physical transportation and storage costs appear highly overpriced when the market tanks and the commodity itself enter the low area of the trading range. When basis differentials show swings twice the expected range, look for transportation to eventually paint a new picture.
This can stave off credit line reductions by major financial institutions. Your overall asset valuations are stable and do not change significantly in this complex closing. It takes several months and flexible leadership to manage this process. This may force you to think outside the box and leave past practices unspoken. The costs for accountants and lawyers are required for closing. General partnerships may require leadership changes for the financial institutions and limited partners to approve this type deal. The long shot that wins is similar to some of the hedging strategies used by the very best trading firms overseas.
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