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CVR Energy, Inc. Message Board

  • vrecupi May 2, 2013 11:10 AM Flag

    What are derivative losses in cvrr

    Hi guys, I'm new to trading and am trying to figure out what the derivative losses mean in cvrr. They had 52.5million in realized derivative losses on their income sheet and also gave a summary:

    "Derivatives Summary. To reduce the basis risk between the price of products for Group 3 and that of the NYMEX associated with selling forward derivative contracts for NYMEX crack spreads, we may enter into basis swap positions to lock the price difference. If the difference between the price of products on the NYMEX and Group 3 (or some other price benchmark as we may deem appropriate) is different than the value contracted in the swap, then we will receive from or owe to the counterparty the difference on each unit of product contracted in the swap, thereby completing the locking of our margin. From time to time the Partnership holds various NYMEX positions through a third-party clearing house. In addition, the Partnership enters into commodity swap contracts. The physical volumes are not exchanged and these contracts are net settled with cash.

    The table below summarizes our open commodity derivatives positions as of March 31, 2013. The positions are primarily in the form of 'crack spread' swap agreements with financial counterparties, wherein the Partnership will receive the fixed prices noted below.

    Commodity Swaps Barrels Fixed Price(1)
    Second Quarter 2013 7,650,000 27.69
    Third Quarter 2013 5,775,000 25.92
    Fourth Quarter 2013 4,875,000 26.98

    First Quarter 2014 3,000,000 33.50
    Second Quarter 2014 1,350,000 32.18
    Third Quarter 2014 75,000 32.00
    Fourth Quarter 2014 75,000 32.00

    Total 22,800,000 $ 28.15"

    The way I understand it is they are basically paying to lock in a certain price of oil to protect their profit margins. Do I have this right?

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    • Yes. But be aware they also could be left with a lessened profit if the crack spread price differrential changes negatively toward them. I think the only question is that if CVRR will continue to be profitable playing the "spread" but by what percent? It may be difficult to sustain the spread hedge like was shown this quarter.

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