13th annual caribbean energy conference
TRANSCRIPT
CONFIDENTIALJanuary 2013
13th Annual Caribbean Energy Conference
Controlling Fuel Costs in the Current Climate
Martin Peichl, Director & Head
Client Solutions Group
About Our Company
CIBC FirstCaribbean International Bank is the largest, regionally-listed bank in the English- and Dutch-speaking Caribbean, serving over 500,000 accounts in 17 markets through 3,400 staff across 100 branches and offices.
The bank offers a full range of market-leading financial services in Corporate Banking, Investment Banking, Treasury Sales and Trading, Retail Banking, Wealth Management, and Credit Cards.
CIBC FirstCaribbean is a member of the CIBC Group. For more information about CIBC FirstCaribbean, visit www.cibcfcib.com
CIBC is rated Aa2/Stable/P-1 by Moody‘s and A+/Stable/A-1 by Standard & Poor's. CIBC was named the strongest bank in North America and third in the world by Bloomberg Markets
magazine
2The CIBC logo is a trademark of Canadian Imperial Bank of Commerce, used by FirstCaribbean International Bank under license.
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CIBC Commodity Products Expertise
– Headquartered in New York, Commodity Products also has operations in Calgary, Toronto,Montreal, London, and Tokyo
– Our 30 commodity experts, drawn from diverse academic and industry backgrounds, workclosely with other CIBC professionals to help address the risk management concerns of ourclients around the world
– The Commodity Products group uses a relationship-driven client management approach toprovide customized commodity derivative solutions to our clients
• We help clients identify and quantify commodity exposures, and provide innovative riskmanagement strategies and products to manage those exposures
– Clients benefit from our deep relationships with producers to source physical commodities
Top Ranked Commodity Dealer
Only dealer to maintain a top 3 ranking in the Canadian Commodity League Tables
CIBC’s Katherine Spector is Top WTI Oil Forecaster
For the 8 quarters ending Sept 30/12, Katherine was the top forecaster as ranked by Bloomberg
Historical Oil Price
Source: Bloomberg
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30
40
50
60
70
80
90
100
110
120
130
140
150
US
D p
er b
arrel
Historical Brent & WTI pricing (January 2008 - January 2013)
Brent
WTI
Consistent Crude Range in 2011-12…and 2013 ?
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$60
$70
$80
$90
$100
$110
$120
$130
WTI Ranges & Means
20112012
Brent Ranges & Means
2011
2012
Source: Commodities Strategy
Oil Prices Reflect Fundamentals in 2011-2012
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8
8.5
9
9.5
10
10.5
11
11.5
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
Market Call on Saudi Crude (3-mo. avg)
Actual Saudi Crude Production
In 2011, Saudi made up
for some of the Libya
shortfall but not all of
it. Commercial stocks
fell and the US/IEA
released SPR.
Pretty orderly
by 2H'12
Lesson learned:
As Iran
sanctions hit
and SPR talked
heated up, Saudi
opened the
pumps in 1H'12.
Stocks built.
Flat-ish Call on Saudi
expected in 2013...
mbd
Source: Commodities Strategy, Petrologistics, IEA, Company and Gov't Reports
Oil Demand Growth is in the Emerging World
7Source: Commodities Strategy, EIA
25
30
35
40
45
50
55
60
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
mbd
Pre-Recession Trend
OECD
Non-OECD
Oil Demand Growth is in the Emerging World
8Source: Commodities Strategy, EIA
25
30
35
40
45
50
55
60
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
mbd
Pre-Recession Trend
OECD
Non-OECD
Status quo oil demand...not a new story, likely only marginal improvement in 2013.
Supply was the story in 2011-12, and is more likely than demand to surprise in either direction in 2013. What we do know is that Iranian volumes will fall further.
Saudi has done a pretty good job of balancing the market.
But the bullish take on this story? During a period of exceptionally weak oil demand growth, it took record Saudi production for several months in a row to balance the market, and global oil prices never went much below $90.
CIBC‘s Commodity Strategist forecast for calendar year average in 2013 and 2014 are:
– Brent $114 and $118
– WTI $98 and $100
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Macro Fundamentals Summary
Rising oil production from Alberta and the US Bakken play means more barrels flowing into the US Midwest. A static number of local refineries in that region, coupled with limited available infrastructure to move barrels out of the US Midcontinent and to the US Gulf, means that volumes pile up in storage.
– Since the barrels are ―stuck‖ in Oklahoma, the price for WTI is depressed
– Many projects on the go to rid this bottleneck (Keystone, Seaway reversal)
– Producers have been crafty in circumventing the bottleneck (rail, truck, barges)
Brent is also a challenged benchmark, faced with steadily declining North Sea production volumes, but has the advantage of being waterborne and, in that sense, more representative of global fundamentals
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Structurally Challenged Benchmarks (WTI & Brent)
We have seen Brent volumes make up an increasingly growing portion of total volumes over recent years, and given the aforementioned issues with WTI, we expect the trend to continue.
Basis risk is the risk associated with hedging with a derivative that is imperfect to the underlying.
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Hedgers: Beware of Basis Risk
– Develop a disciplined hedging strategy (align with Company‘s overall strategy)
• Develop a consistent, mechanistic approach to executing commodity
hedges
– Decide on a ‗core‘ amount to hedge
– This should be considered strategic (i.e. protecting Company‘s cash flows)
– Help the Company survive price spikes
– Typically executed with more vanilla products
• Minimize consensus decision making
• Understand the ―risk management toolbox‖, how to use each instrument, and have flexibility to use a variety of instruments
• Price taker (hedger) vs. market maker (speculation)
How to manage Energy Price Risk
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– Once the core is decided, the next step is to designate a tactical amount• This allows for some ‗opportunistic‘ hedging to take advantage of market conditions
• More effort required, monitoring the market and your own positions
– Strongly consider option based risk management strategies
• Ensure the hedging strategy does not remove your participation in lower commodity prices, especially in bearish markets
• Event Risk vary significant in energy markets – capture price movements in your favour
– Typically most clients (when starting) will build the hedge ratio over time (this helps with smoothing your average price in)• Once up to the desired hedge ratio, the maturing transactions are replaced with new
transactions for the same tenor– Your hedge rolls with the market and helps dampen against price spikes
How to manage Energy Price Risk
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Product Review
Hedging 101
– Relatively simple product suite
– Objective is to minimize/eliminate price volatility, stabilize earnings, protect project returns…
– Accounting and price environment has moved clients more towards generic structures
Hedging Product Definitions
– Fixed Price Swap:
• An agreement to pay / receive a fixed price vs. receive / pay a floating price
– Call Option:
• Buyer pays a premium for the right to purchase the underlying commodity at a specified strike price
– Put Option:
• Buyer pays a premium for the right to sell the underlying commodity at a specified strike price
– Collars:
• A combination of options, whereby the cost of a call / put is financed by selling a put / call
Fixed Price Swap
Client pays a fixed price over the swap term
Settlement occurs on a monthly basis (all prices below in USD)
Monthly payments are based on the difference between the Swap Price and average price of the underlying asset
Indicative Terms on Brent Client pays fixed $109.20/barrel for March – May 2013 on 5,000 barrels/month
Client makes paymentFixed Swap Price
Client receives payment
ForwardFloating Curve
Price
TimeMarch April May
$125.00
$120.00
$115.00
$109.20
$105.00
$100.00
$95.00
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Call option (Client buys)
Client pays upfront premium which provides for protection once the average price for the month exceeds the strike price of the option
Allows Client to participate in lower commodity prices
Settlement occurs on a monthly basis (all prices below are in USD)
Indicative Terms (Client buys call option for 5,000 barrels/month of Brent) March – May 2013, $109.20/barrel strike costs $4.95/barrel. Total premium for 3 months is $74,250
March – May 2013, $114.66/barrel strike costs $2.85/barrel. Total premium for 3 months is $42,750
March – May 2013, $120.12/barrel strike costs $1.56/barrel. Total premium for 3 months is $23,400
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No cash flows occur
Call option strike
Client receives payment
ForwardFloating Curve
Price
TimeMarch April May
$125.00
$120.00
$115.00
$109.20
$105.00
$100.00
$95.00
Zero Cost Collar
Client buys a call option and at the same time sells a put option
- The sale of the put will fund or pay for the purchase of the call, such that the structure does not have an upfront payment
Structure provides Client protection should the price of the underlying asset exceed the strike price of the call (i.e. ceiling), while participating in lower commodity prices subject to the strike price of the put (i.e. floor)
Settlement occurs on a monthly basis (all prices below in USD)
Indicative Terms Client buys (on Brent) a call option at $104.50/barrel and sells a put option at $114.66/barrel for
March – May 2013 on 5,000 barrels/month
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Price
Client makes payment
Client receives payment
ForwardFloating Curve
TimeMarch April May
Call option strike
Put option strike
No cash flows occur
$125.00
$120.00
$114.66
$104.50
$100.00
$95.00
Bull Call Spread (Client buys)
A bull call spread is a bullish vertical spread option strategy, where Client buys a call option with a lower exercise price and sells a call option with a higher exercise price. This allows protection up to the higher exercise price, after which Client is partially exposed to the market price of the underlying
Allows Client to participate in lower commodity prices
Settlement occurs on a monthly basis (all prices below are in USD)
Indicative Terms: Client buys and sells a call option on Brent for 5,000 barrels/month March – May 2013, $109.20/barrel & $119.20/barrel bull call spread costs $3.35/barrel. Total
premium for 3 month is $50,250
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No cash flows occur Call option strike
Client receives payment
ForwardFloating Curve
Price
Time
$125.00
$119.20
$114.00
$109.20
$105.00
$100.00
Upside limited to net difference
March April May
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Advantages / Disadvantages
Advantage Disadvantage
Fixed Price Swap Locks in a guaranteed price (Zero Price Volatility) No premium outlay
Loss of downside participation Additional documentation (ISDA/CSA agreements)
Purchase of Cap Full protection above strike level 100% downside participation
Premium outlay
Collar Transaction Full protection above ceiling Some downside participation No premium outlay (if zero cost), lower cost than cap (if on a funded basis)
Loss of downside protection below floor Additional documentation (ISDA/CSA agreements)
Purchase of Bull Call Spread
100% downsideparticipation Reduced premium cost as compared to outright cap purchase
Upside protection limited to the difference between the strikes of the bought and sold caps
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Commodity Products
Energy– Crude Oil: WTI and Brent
– Petroleum Products: Heating Oil—NYMEX, RBOB
– Natural Gas: Henry Hub, Alberta (Physical, Financial), All major financial hubs
– For the commodities above we trade:
• Cleared futures
• Cleared and OTC swaps
• Cleared and OTC options (vanilla and exotic)
Commodity Index Products– Beta: Commodity Benchmark Indices
– Enhanced Beta: Deferred Contracts, Custom Rolls, Seasonal Rolls, Volatility Control
– Alpha: Market Neutral, Long-Bias, Volatility Control
– Custom: Curve Strategies, Custom Rolls, Tactical Strategies, Switch Strategies
Agricultural Commodities– Grains: Soybean Oil, Soybeans, Soybean Meal,
Wheat, Corn
– Softs: Coffee, Cocoa, Sugar, Cotton
– For the commodities above we trade
• OTC swaps
Commodity Products
Metal Derivative Capabilities– Cleared Futures
– Forwards
– Swaps
– Leases
– Deposits
– Cleared and OTC Options
– Structured Products
– Allocated and Unallocated Physical Gold and Silver
– Customized Strategies
Physical Products Available and Requirements
Physical Gold, Silver
Unallocated trades are executed using the CIBC CERTS (certificate) program
Contact the Retail desk in Toronto for trade notional < $500K USD
Contact the Institutional desk in New York for trade notional > $500K USD
For allocated accounts the minimum dealing size is $5M USD
Bars and coins are available
*LME seat application pending
Precious Metals
Gold
Silver
Base Metals*
Copper
Aluminum
Zinc
Nickel
Lead
Tin
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CIBC FirstCaribbean Client Solutions Group
Martin PeichlDirector & Head, Client Solutions GroupTelephone: (246) 367 2169Email: [email protected]
Vincenzo DicembreDirector, Client Solutions GroupTelephone: (246) 367 2845Email: [email protected]
Winville LarcherDirector, Client Solutions GroupTelephone: (246) 367 4639Email: [email protected]
Senior Coverage
Ian ChinapooManaging Director, Corporate & Investment BankingTelephone: (868) 822-5059Email: [email protected]
Contacts
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Disclaimer
The material in this proposal is a description of prospective transactions. Thisproposal does not constitute any recommendation that any person enter into thetransactions described or any similar transactions nor does it constitute anyprediction of likely future movements in any interest or currency exchange rates orthe price of any commodity or any representation that any such future movementswill not exceed those shown in any illustration accompanying this proposal.
The information contained herein is provided by CIBC FirstCaribbean InternationalBank, is confidential to its recipients and may not be reproduced or disseminated tothird parties without the express authorization of CIBC FirstCaribbean InternationalBank. It is indicative only and does not constitute an offer to sell or solicitation of anoffer to purchase any financial instrument.
CIBC FirstCaribbean International Bank does not make any express or impliedrepresentation regarding any financial instrument mentioned herein and shall not beliable for any loss or damage arising out of any person‘s reliance on this information.CIBC FirstCaribbean International Bank and its affiliates may enter into transactionsor make markets in instruments identical or economically related to the financialinstruments mentioned herein.
Any transaction entered into will be entered into by CIBC FirstCaribbeanInternational Bank and any person as principals and CIBC FirstCaribbeanInternational Bank will have no duty of best execution nor any fiduciary dutytowards any person notwithstanding that there may be an existing bankingrelationship between CIBC FirstCaribbean International Bank and any such person.
CIBC FirstCaribbean International Bank assumes no responsibility to assess oradvise on, and makes no representation as to the appropriateness of thetransactions described for any purpose and any person party to a transaction mustsatisfy itself, if necessary by taking independent advice, as to the appropriateness ofthe transaction for the requirements of such person.