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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 cash flow to support 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.

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 40 per cent of ARC's production. Natural gas represents the other 60 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 24 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 increase certainty of cash flow while allowing for upside price participation.

Why does ARC have a hedging program?

ARC's hedging activities are conducted by ARC's financial risk management team in accordance with the following objectives as its mandate:

  • Protect unitholder return on investment;
  • Provide for greater certainty of cash flow to protect distributions and protect budgeted capital expenditures;
  • Employ a portfolio approach to risk management 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; and
  • Ensure profitability of specific oil and gas properties and economics of capital expenditures that are more sensitive to changes in market conditions.

ARC's hedging transactions are undertaken with financially sound, credit worthy counterparties to reduce exposure to risk.

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 through the use of funded puts, put spreads, collars, three-way collars and swaps.

What is ARC's latest Hedged Position?

For a more detailed summary of ARC's latest hedged position please click here. (PDF)