PwC

Hot topics Treasury seminarCommodity risk

management technology

18 June 2015Discover and unlockyour potential…

Program

2

Drivers of trading results Positions and “controllable” variances Making the supply chain fully “financial” Implementation of the trade margin

improvement proposition

Drivers of trading results

Hot topics treasury seminar

Commodity risk management technology

Limited (Actionable) Insights into Drivers of Trading Results

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418 June 2015

Trading P&L

Actionable information

Trading P&L and related KPI• Assessment of ex-post profitability of

trading operations• Underlying drivers of performance

not transparent

Fundamental drivers of trading P&L• Trading results can be attributed to

supply chain trading, asset-backed trading and proprietary trading

• Performance attribution enables decision-makers to better evaluate the risk-return trade-off generated by various trading activities.

• Only available on an ad-hoc basisActionable information into performance drivers• Optimization of trading and logistical

decisions requires up-to-date information on key performance drivers

• Not available across the full value chain.

Observable to Decision-Makers

Not fully observable to Decision-Makers

Fundamental drivers

Create more actionable

insights

Positions and “controllable” variances

Hot topics treasury seminar

Commodity risk management technology

Capturing more marketing & trading value requires insights into positions and “controllable” variances along the value chain

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18 June 2015

Geographical Arbitrage & Freight Optimization

Product Arbitrage & Cross Commodity Optimization

Temporal Arbitrage & Storage Optimization

Objective• Triangulation of freight movements

exploiting regional imbalances between supply and demand

Key Insights Required• Overview of global commodity book

including expected sales and supply volumes as well as transport positions for short and medium term periods

• Identification of flexibilities in contracts allowing for cargo diversion and location swaps

• Regional supply/demand dynamics and price patterns

Trader

Crude Oil

Naptha Jet Fuel

Fuel Oil

Objective• Capturing cross-commodity price

differentials by blending, refining and/or processing commodities

Key Insights Required• Overview of cross-commodity

positions • Insights into customer demands in

downstream markets for refined/processed products

• Availability and prices for capacities (storage, handling and processing)

• Dynamics of cross-commodity price differentials

Objective• Utilize access to “cheap” storage to

capitalize on inefficiencies in the term structure of commodity prices

Key Insights Required• Understanding of storage costs for

both own assets and third parties• Term structure of commodity prices

taking liquidity into account• Overview of available funding

opportunities and relevant costs

Insights into positions and controllable variances required for four major steering areas

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718 June 2015

Logistics & Short-term Trading

Planning (Mid Term) & Risk Management

Usage of Working Capital

Real-time identification of opportunities for exploiting contractual flexibilities.

Support of decision-making processes (e.g. deal approval process) for non-standardized contracts used for selling/buying of flexibility.

Valuation of flexibility to ensure that it is fully priced upon origination and that its value can be recovered by trading operations.

Exploiting Contractual Flexibility

Increasing throughput by superior production and sales forecasting accuracy and alignment of planning processes between sales and assets/production.

Transparency of commodity and transportation books enabling decision makers to identify short-term trading opportunities.

Alignment between medium-term planning of supply and sales volumes, capacity positions (storage, transport, processing) and risk capital allocations.

Identification of portfolio needs in the medium term, i.e. required structure of supply contracts, needed positions in physical assets and the optimal design of the hedging path.

Alignment of financing and logistical processes in order to minimize usage of working capital.

Identification of opportunities for off-balance sheet financing of trades using trading positions as collateral.

Required Insights in positions and controllable variances can be generated by modelling of trading activities and business intelligence analytics

Hot topics Treasury seminar

818 June 2015

Short-Term Trading & Logistics Optimization

Structuring & Valuation of Contracts

Portfolio Planning for Realizing Intrinsic & Extrinsic Value

Pre-Deal AnalyticsShort Term Trading & Logistics

Analytics

Portfolio Optimization Analytics (Mid Term)

Production (Upstream)

Lique-faction StorageLoading Births

ShippingUnloading

BirthsStorage & In-Store Trading

Regasi-fication

Customers

Spot Market

Entry Trans. System

FOB DES

Transportation Flexibility Storage & Dispatch FlexibilityProduction Flexibility

ReloadsLiquids

Processing

Financial Hedging

Market-Based PricingCost-Based / Net-Back Pricing

Pricing (commodity price, risk

premia, fixed cost revovery for assets etc.)

Risk Assessment (Controllable vs. non-controllable

risks)

Capacity Checks (Storage, transport,

supply etc.)

Contract Approval (Standard vs.

structured contracts)

Exercise of Flexibilities (Destination flex, storage,

cross-product)

Risk Exposures(Market risk, credit risk,

capacity risk – controllable vs. Non-controllable risks)

Mid-term planning (Controllable vs. non-contrallable

volumes, storage & transport capacities, supply etc.)

Hedging Path

Scheduling & Dispatch

Merit Order of Supply Sources

Identification of controllable drivers of trading margins along the whole value chain

Short-Term Forecasting(Controllable vs. non-contrallable sales and production volumes)

Making the supply chain fully “financial”

Hot topics treasury seminar

Commodity risk management technology

Making the supply chain fully “financial” enabling traders and other decision makers to optimize their portfolio

Hot topics Treasury seminar

1018 June 2015

Forward Book Dispatch BookDelivery

Expected supply/sales

volumes

Sales price vs. market price (@ delivery location)

Expected Transportation

Costs

Extrinsic values in commodity/

transport contracts

Supply price vs. market price (@ delivery location)

Markups based on expected

quality

Number of Days ballast vs.

sailing daysDemurrage /

Port Congestion

Vessel QualityRepositioning of

vessels (premium/discount)

PFA Logistical congestions

Customer issues (LC)

Dr

ive

rs

of

Tr

ad

ing

Pn

LO

pe

ra

tiv

e

Pr

oc

es

se

s

Planning processes

Pricing processes

Scheduling / Operations

Note: In addition to the key operative processes listed above, further issues also require a different treatment depending on whether the forward book or the dispatch book is in focus. For instance, this applies to the required design of internal controls.

Valuation against forward curve; assumption of average “budget” rates for non-tradable cost/revenue items (e.g. quality markups, transport differentials etc.)

Valuation effects driven by (1) additional fee items (e.g. demurrage) and (2) marketing/covering of excess/deficit positions in spot markets (e.g. chartering additional ship in spot market)V

alu

ati

on

A

pp

ro

ac

h

Notification of counterparty

Implementation of the trade margin improvement proposition

Hot topics treasury seminar

Commodity risk management technology

Implementation of the Trade Margin

Hot topics Treasury seminar

1218 June 2015

Identify Value Drivers & Controllable Variances

Embed Valuation Approach in

Trading Process

Define Valuation Approach

Align Trading Organization

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Analysis of Business Model & Trading Strategy

• Trading strategy & approach

• Portfolio of physical assets

• Structure of key supply, sales and transport contracts

Identification of Key Drivers of Trade Margins

• Assessment of different factors on trading results regarding impact on P&L

Controllable and Uncontrollable Drivers

• Deep Dive into key drivers in order to identify controllable drivers and appropriate actions

Design Valuation Approach

• Modelling of Margin Generation in Trading

• Alignment of Valuation Approach with Trading Approach

• Extrinsic vs. Intrinsic Valuation of Flexibilities

Modelling of Drivers of Trade Margins

• Market prices including spot- and forward markets

• Tradable vs. non-tradable value drivers (market prices, non-traded value drivers)

• Differentiation between controllable and non-controllable drivers

Align Pricing of Contracts

• Adjust pricing model for all contracts to overall valuation model

• Coverage includes pricing of sales, supply and capacity contracts

Align Steering Model for Portfolio

• Adjust steering model for mid-term trading and short-term trading/logistics

Align Processes for Pricing of Contracts and Portfolio Steering

• Ensure adequate data feeds from market

• Establish interfaces to relevant units with own organization

Key Controllable Drivers identified

Valuation Approach based on quantitative Model of Trading Margins

Identify organizational gaps

• Analyze relevant interfaces between organizational units (e.g. supply vs. logistics)

• Adequacy of data collection processes (quality, speed, granularity) and related IT-systems

Define to-be implementation within the trading organization

• Define to-be implementation including roles & responsibilities for models and data, alignment of IT systems landscape etc.

Pricing models for all contracts aligned with overall valuation model

Organization is fully aligned with trade margin improvement proposition

Questions…

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More information

Trainer:Jeffrey BollebakkerPhone number: +31 88 7925004E-mail: j.bollebakker@nl.pwc.com

18 June 2015Hot topics Treasury seminar

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