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Upstream: Outsourcing: Undisclosed Company: Hedge Execution/Asset Acquisition

Opportune LLP was approached by an oil and gas exploration and production company (“Producer Co.”) that was seeking assistance to develop a hedging program associated with a new asset acquisition. Producer Co. engaged Opportune to provide risk management advisory and hedge execution services needed for its planned business expansion.

Producer Co.’s lending syndicate included a covenant in its new credit agreement that required Producer Co. to hedge a minimum of 75% and a maximum of 90% of forecasted net PDP (“Proved Developed Producing”) volumes for both crude oil and natural gas for a 36-month period. Management would be required to execute these hedges within a limited timeframe after acquiring new assets. This meant that as Producer Co. acquired producing assets, they would have to actively hedge the bulk of new production. With a limited timeline, Producer Co. needed assistance executing trades in a timely and prudent manner that would prevent defaulting on the debt covenants.

While completing the asset acquisition, management did not have the bandwidth nor expertise to arrange new hedge counterparties, complete necessary regulatory requirements or coordinate execution of the hedges. Initially, Producer Co. only had one hedge counterparty. Opportune coordinated the execution of ISDA (“International Swaps and Derivatives Association”) agreements and other Dodd-Frank/EMIR (“European Market Infrastructure Regulation”) regulatory requirements in order to compete the trades with additional counterparties. Opportune helped determine the necessary volumes to be hedged by utilizing proprietary models and systems for tracking production volumes, hedge volumes and the weighted average prices secured by hedging arrangements for each product and time period.

Management was unsure about potential hedge strategy alternatives. Opportune provided hedging strategy alternatives, including swaps, purchased puts and costless collars with multiple put levels for management to consider. Once a strategy was developed, Opportune executed the trades with the available counterparties and updated the hedge coverage tracking system accordingly. Producer Co. and Opportune regularly communicate regarding ongoing hedging alternatives and market conditions. On an ongoing basis, as hedges expire, additional hedges are executed to stay in compliance with debt covenant requirements.

Management teams should carefully consider hedging strategy implications, as well as the associated financial reporting requirements. Opportune uses its deep energy experience to assist companies with their hedging programs. Our experts examine the relevant factors and provide a comprehensive plan to implement an effective hedging program. Our strategic methodology is designed to support our clients’ particular business objectives, including driving results while meeting transactional standards and debt covenant compliance.

Shane Randolph

Managing DirectorOpportune LLP