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Hedging

Hedging: a Function of ARC's Risk Management Program

ARC continues to maintain an ongoing risk management program to reduce the volatility of revenues in order to enhance stability of distributions, protect acquisition economics, and fund capital expenditures.

What is Hedging?

Hedging is the use of financial contracts or derivatives to mitigate exposure to an underlying asset. For example, as a producer of oil and gas, ARC can hedge its production by entering into a financial agreement, which provides ARC with minimum price assurance on its produced volumes. The Trust currently hedges its oil and gas production, its foreign exchange and interest rate exposure, and its power usage.

What is ARC's production split?

ARC's production is split between oil and liquids and natural gas. Oil and liquids production accounts for roughly 50 per cent of ARC's production. Natural gas represents the other 50 per cent of production. For more detailed information on ARC production please click here.

How much of this production does ARC hedge?

Typically ARC targets to hedge up to 50 per cent of its production for periods up to 12 months in the future. All hedging transactions are executed in accordance with the Risk Management Mandate and Board of Director guidelines that allow ARC to apply a systematic approach of protecting budgeted price levels to ensure distributions while allowing for maximum upside price participation.

What is ARC's latest Hedged Position?

For the remainder of 2008 the percentage of forecast volumes protected is: 50 per cent in the second quarter, 32 per cent in the third quarter and 29 per cent in the fourth quarter.

For a more detailed summary of ARC's latest 2008 Hedged Position please click here. (PDF)

Why does ARC have a hedging program?

The Trust is committed to managing its commodity price and foreign exchange exposure. ARC's hedging activities are conducted by an internal Risk Management Committee that has the following objectives as its mandate:

  • Protect unitholder return on investment;
  • Provide for minimum monthly cash distributions to unitholders;
  • Employ a portfolio approach to hedging by entering into a number of small positions that build upon each other;
  • Participate in commodity price upturns to the greatest extent possible, while limiting exposure to price downturns;
  • Ensure profitability of specific oil and gas properties that are more sensitive to changes in market conditions.

The Trust's commodity and foreign currency hedging transactions are undertaken with financially sound, credit worthy counterparties to reduce exposure to risk. All contracts require approval of the Trust's Risk Management Committee prior to execution.

To learn more about ARC's hedging program please click here.
ARC Hedging Presentation -- September 2007 (PDF)

What instruments does ARC use to hedge?

Over time ARC has expanded its use of hedging structures from costless swaps and collars to include the use of funded positions in order to offer greater upside price participation and protection over a more relevant range.

ARC uses a portfolio approach to establish protection primarily through the use of funded puts, put spreads, collars, and 3-way collars. For further detail on the protection and upside price participation offered through the use of these positions, please follow the link above for the “ARC Hedging Presentation – September 2007".