Natural Gas

Caps & Collars

Caps and collars are hedging strategies designed to help protect customers from rising natural gas prices. A cap gives customers the right to purchase natural gas at a ceiling price when the market price is higher and at the market price when it is lower. Caps are most beneficial to customers who wish to limit their exposure to high prices, but take full advantage of lower prices when the natural gas market declines.

A collar likewise gives customers the right to purchase natural gas at a ceiling price when the market is higher and at the market price when it is lower, but with a lower limit of the floor price. This allows customers to limit exposure to upward price movements at a lower cost than a cap. Hess also offers "costless collars", whereby the floor price point pays for the ceiling protection. Collars are best for customers who wish to limit exposure to high market prices, but at a lower cost than through caps.

How caps work:

  • You contract for exact volumes (minimum 10,000 MMBtus per month)
  • The NYMEX portion of your natural gas price is the lower of the cap or the NYMEX last day settlement price
  • There is a one-time charge based upon the ceiling price you set

Benefits of a cap:

  • Limits exposure in rising markets
  • Provides opportunity to take advantage of lower prices (regardless of how low)
  • Meet budget objectives while maintaining participation in downward markets
Cap Pricing Example

 

How collars work:

  • You contract for exact volumes (minimum 10,000 MMBtus per month)
  • The NYMEX portion of your natural gas price will never exceed the cap or drop below the floor. If the NYMEX falls between the cap and the floor, you pay the NYMEX last day settlement price
  • There is a one-time charge (except in the case of a "costless collar") based upon the ceiling and floor price you set

Benefits of a collar:

  • Limits exposure in rising markets
  • Allows some participation in a downward market (above the floor price)
  • Meet budget objectives at a lower cost than a cap in exchange by accepting a floor price
Cap Pricing Example

 

Cap and Collar Comparison

Cap Collar Costless Collar
Protection from Rising Market* Yes (at desired price ceiling) Yes (at desired price ceiling) Yes (at desired price ceiling)
Protection from Falling Market* Yes Some (only to floor) Some (only to floor)
Cost One-time One-time (less than the cap) None
Price Point Discretion You set the ceiling price point You set the ceiling and floor price points You set the ceiling or floor and the market determines the other price point

*Customers must lock in basis to achieve total price protection.