RE:RE:RE:RE:RE:RE:RE:RE:RE:RE:Hedges"Hey Houba. I once thought along the same lines as you did, and that the price Peyto received for the basis deals was the total netback..."
???????????
A basis deal was never meant to be a total netback! Where did you get this?
I will try to be as patient and clear in my explanation as you. : >)
When you do a basis trade in a futures' market, you buy a future contract AND you sell another one with the same expiry date.
In the previous example:
"...Peyto paid $1.40 USD/mmbtu to ship 257,500 mmbtu/d.
Peyto sold 20K mmbtu/d at $0.89/mmbut. Ultimate price received was $1.27/mcf CAD...."
First step: In 2020, Peyto buys the basis for calendar 2021, ie. they buy 257,500 mmBtu/d futures on the NYMEX for delivery to Henry Hub and they sell 257,500 mmBtu/d futures at AECO with the same contracts delivery dates (every single months of 2021).
LONG + 257,500 mmBtu/d Nymex Futures
SHORT - 257,500 mmBtu/d AECO Futures (or its equivalent in Gj/d in CAD).
Time goes by and Peyto decides to sell 20,000 mmBtu/d of futures on the NYMEX for every months of 2021.
SHORT - 20 000 mmBtu/d Nymex Futures
Following this operation, Peyto's position become:
LONG + 237,500 mmBTU/d Nymex
SHORT -257,500 mmBTU/d AECO
LOCK 20,000 mmBtu/d (or its equivalent in GJ/d in CAD).with a given NETBACK when they delivered the 20,000 mmBtu/d at AECO.
The $0.89usd/mmBtu is probably net of the $1.40usd/mmBtu transport meaning they forward sold at $2.29usd/mmBtu to Henry Hub and there is $0.89usd/mmBtu left after transport..
Does this make sense?