Damages Analysis Regarding Price Risk Management Strategy

Analysis Group was retained by counsel for a large energy company ("seller") to analyze a natural gas price-risk management purchasing strategy that it had structured for a large industrial firm ("buyer"). The buyer had sued the seller to recover alleged damages resulting from implementing the options-based component of the strategy. The buyer alleged that the strategy was not reasonable given its objectives.

An Analysis Group team including Managing Principal Gaurav Jetley worked closely with our academic affiliate, an expert in finance and energy markets, to rebut the damages analysis presented by the buyer's expert and also to demonstrate the reasonableness of the strategy. We used NYMEX data on natural gas futures and options to analyze the success of the strategy in mitigating price risk for each year from 1994 forward. Our analysis showed that, for all years, the proposed program helped reduce the volatility of the purchase price of natural gas that would have been paid by the buyer. In addition, our work also involved ascertaining whether natural gas prices from 1994 forward were mean-reverting. We used mean-reversion analysis to determine the reasonableness of the strategy's use of standard metrics, such as stochastics and the Relative Strength Index, to time the purchase and sale of natural gas options.

Overall, our analysis showed that the seller's strategy was reasonable and that the plaintiff's damages estimate was based on an incorrect application of the strategy. Our analysis helped counsel reach a favorable settlement.