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Benefits of Energy Price Stabilization 8th Africa Oil & Gas Trade and Finance Conference Marrakech, April 28, 2004 Deutsche Bank Not an official UNCTAD.

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Presentation on theme: "Benefits of Energy Price Stabilization 8th Africa Oil & Gas Trade and Finance Conference Marrakech, April 28, 2004 Deutsche Bank Not an official UNCTAD."— Presentation transcript:

1 Benefits of Energy Price Stabilization 8th Africa Oil & Gas Trade and Finance Conference Marrakech, April 28, 2004 Deutsche Bank Not an official UNCTAD record

2 2 Contents Section 1Energy price stabilization 2Benefits of Hedging in Structured Finance 3Current hedge environment 4Credentials, Capabilities, and Contacts

3 Energy Price Stabilization Section 1

4 4 Energy Price Stabilization Overview n Governments are affected by energy price movements through : −Direct exposure: oil exporting countries or countries with regulated domestic energy markets −Indirect exposure : oil importing countries and countries with liberated internal energy market n Governments tend to “manage” this in various ways: −Passive −Reactive through the creation of an energy fund −Proactive through the implementation of a macro risk management strategy

5 5 Energy Price Stabilization Overview n Passive: at the mercy of the market n Reactive: at the mercy of change in economic policy making and politicians n Proactive: use price risk management tools to mitigate the impact of adverse energy price movements

6 6 Proactive Strategic Risk Management n Strategic objective classically is “Management of Cash Flow uncertainty” n Two-step process needed in risk management – Measure risk: quantify how oil prices adversely impact cash flows – Change risk: if risk tolerance exceeded, hedges can alter profile

7 7 Reasons to hedge : academic financial theory n Pure Economists view (Modigiliani-Miller): In perfect financial markets (absence of taxes, no transaction costs, constant investment and production policy, no bankruptcy costs, full and symmetric information amongst market participants): Financial structure (including hedging) is irrelevant to firm’s value. n Financial Economists reasons to hedge all focus on market imperfections: ‒ Cost of funds : Optimization of investment policy / internally generated cash flow ‒ Lowering probability of financial distress ‒ Reduction of expected taxes

8 8 “Local” oil prices n Global nature of oil market will make any local pricing mechanism dependent on the international oil price n Even in local subsidized price environment, somebody (government) will ultimately carry international oil price risk

9 Benefits of Hedging in Structured Finance Section 2

10 10 Transaction Diagram

11 11 Structured Finance Basic Considerations n Typically an issuance secured by future commodity receivables involves an issuer that generates offshore denominated receivables from sales/service provided to offshore customers n When analyzing the probability of timely payments of both interest and principal, the lenders and rating agencies will consider, specifically, the factors listed below: – The Borrower’s credit – The Borrower’s ability to continue to provide services – The type and importance of the service provided – The nature of the receivables and payment terms – The size and maturity of the issue – The legal structure of the issue

12 12 Structured Finance Risk Assessment n Typically these structures mitigates the following risks: – Price risk: The risk that adverse price movements will threaten the payments. The price risk is mitigated by the hedge – Delivery Risk: The risk that the Borrower will not make the scheduled deliveries of natural gas – Currency control risk: The risk that the Borrower will not have access to foreign currency to make scheduled debt service payments. This risk is mitigated by the pledge of offshore receivables to the lender – Credit Risk: Risk that the Borrower will not be able to meet its debt payments – Sales risk: The risk that the commodity produced is not sold. This is mitigated by the designation of approved buyers

13 13 Why Hedge Structured Finance Transactions The decision not to hedge is itself a position taking or speculative view of the market. n Commodity producers and consumers are both exposed to substantial risk should the price of their associated commodities move in an adverse direction n Therefore, using financial hedging tools the borrower can: – Minimize debt service coverage ratios – Maximise borrowing leverage – Reduce risk associated with volatile commodity markets – Stabilise income stream – Allow for more predictable and accurate forward planning – Secure shareholder value n Any activity which minimises an inherent and volatile business risk is viewed favourably by lending institutions. Generally ratings agencies view energy risk management positively, especially when analysing cash flow volatility

14 Current Hedge Environment Section 3

15 15 Average 2004 Brent price Analysts forecasts range and expected accuracy  Current average (Reuters Jan 2004 survey, spot price 31 USD/BBL) Brent forecast is 24.70 USD/BBL  Studying analyst performance over last 5 years shows systematically bearish “mean-reversion” based forecasts have underestimated realized prices by an average 25%-35%, imply a “corrected” 32.40 USD/BBL Brent price

16 Credentials, Capabilities, and Contacts Section 4

17 17 Example Publications n Daily – Coal Report – Energy Crack Report – Metals Daily – Natural Gas Report – Relative Value in Base Metals n Weekly/Monthly – Commodities Weekly – CFTC Commitment of Traders – Commodities Update – EIA Weekly Outlook – EIA Weekly Recap – Energy Fundamentals Monthly

18 18 Energy Global crude and oil product market maker 24 hour trading capability Regional natural gas market maker Regional electricity market maker Swaps and options capabilities Commodity Credentials: Energy European Power and Natural Gas U.K. Based Trading Correlation Trading European Weather (Carbon Credits) Crude Oil WTI Brent (IPE) Dated Brent Dubai Tapis Japanese Crude Cocktail Other Grades by agreement Refined Products Jet Fuel Gasoil / Diesel Fuel Oil Gasoline Naphtha LPG Tenor Crude Oil: Up to 10 yrs Refined Products: Up to 5 yrs Natural Gas US Natural Gas NYMEX and Basis Coal & Freight Swaps & Options Energy/ Commodity Derivatives House of the Year Winner

19 19 Contacts Structuring desk + 44 207 545 7893 Sales desk+ 44 207 547 4305 Trading desk+ 44 207 547 3874

20 20 Disclaimer The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but we make no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of such information. In addition we have no obligation to update, modify or amend this communication or to otherwise notify a recipient in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggest that recipients seek their own independent advice in relation to any investment, financial, legal, tax, accounting or regulatory issues discussed herein. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate or other market or economic measure. Furthermore, past performance is not necessarily indicative of future results. This communication is provided for information purposes only. It is not an offer to sell, or a solicitation of an offer to buy, any security, nor to enter into any agreement or contract with Deutsche Bank AG or any affiliates. In addition, any subsequent offering will be at your request and will be subject to negotiation between us. It is not intended that any public offer will be made by us at any time, in respect of any potential transaction discussed herein. Any offering or potential transaction that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation and in such case the information contained herein will be superseded in its entirety by such documentation in final form.

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