Published: June 15, 2009
Hunting PLC is an international energy services provider to the world’s leading oil and gas concerns in the upstream sector. Established in 1874, it is a fully listed public company traded on the London Stock Exchange. Global “upstream” activity is co-ordinated through Hunting Energy Services. With a large presence in North America, Europe and Asia, this has spawned a small but consistently successful E&P division in the USA.
Hunting PLC’s group treasury department is based in London, UK and provides treasury services across the group which spans the Americas, Asia, Middle East and Europe. As a GBP-based company, but with revenues in USD, one of treasury’s major activities is to translate USD revenues back into GBP, for which we use FX spot and forward transactions. In addition, we have a number of option-based products, such as average rate options to hedge P&L and instruments known as FX forward extra or forward plus. These are similar to a barrier option, but give us the potential to add some additional value to the transaction. They are zero cost and give us the right to buy GBP and sell USD at a fixed rate. This right becomes an obligation when cable reaches a certain limit rate. We also use FX swaps for cash management purposes swapping GBP into USD to fund short term USD deficits.
As a GBP based company, but with revenues in USD, one of treasury's major activities is to translate USD revenues back into GBP, for which we use FX spot and forward transactions.
Each business reports to treasury with their exposure information. We know the general annual trends for each business, but we need to be advised of exceptions in particular, such as capital expenditure or additional contracts from the previous year. Business units use different mechanisms for communicating with treasury, either telephone or email. In the future, we intend to move to a fully systems-based environment where deal requests can be made electronically in real time. Our policy is to hedge all exposures of $250,000 or above. We hedge forward, generally up to twelve months although in some exceptional cases we have exceeded this. In addition to exposure information, we receive a currency cash forecast per quarter for each business. We then look at exposures and liquidity requirements every week for the following month, and sell USD accordingly. Treasury operates as an in-house bank so we buy USD from the business unit, and deal in the market, with a back-to-back intercompany transaction. We deal both by telephone and using single-bank dealing systems. Over the next year, we intend to move to a multi-bank dealing system for FX dealing. [[[PAGE]]]
We seek hedge accounting treatment wherever possible, and originally tried to manage this activity using spreadsheets and our Bloomberg system. We used Bloomberg for pricing and used the valuation generated to compare with the valuations submitted by the banks. Although we could demonstrate a degree of hedge effectiveness this way, a manual solution of this kind meant that this was not watertight. Consequently, we decided to seek a solution specifically designed to support hedge accounting and ultimately opted to implement Reval®.
We first input all deals into IT/2, our treasury management system (TMS). We then input all our hedging transactions which cross over a month end or Balance Sheet date into Reval. To these we add the underlying exposures and link them with a hedge relationship to prove hedge effectiveness or otherwise under IAS 39. We go through the same process for all derivative transactions, whether they qualify for hedge accounting treatment or not. In this way, we can provide an independent valuation of these deals and reconcile them against the bank’s valuation. In the early days, there were often considerable differences between the two valuations, often due to Reval and the banks’ systems using different valuation rates, but this has been largely remedied since.
Like most companies, we have seen our business requirements and treasury activities changing over the past few months. In particular, there is an even greater focus on avoiding transactions which do not qualify for hedge accounting treatment where these could potentially impact on our financial results. For example, we need to be aware that we cannot have certain types of instruments outstanding at the end of accounting periods in the future, due to the volatility that they can introduce into the income statement. Clearly, it is the reduction of this volatility in the Financial Statements, brought about by foreign exchange and interest rate movements, that we in Treasury are tasked with. This can be frustrating, as although it is not a particular issue now, instruments that do not qualify for hedge accounting under the terms of IAS 39 can be highly effective in hedging foreign exchange exposure. This situation seems to be an example of where accounting standards are driving our decision-making, as opposed to the requirements we have as a company determining our hedging policy.
Now that we have our hedge accounting needs under control, we will be turning our attention to a wider systems project over the course of the next 12 to 18 months, to expand our use of our TMS, IT/2, which we use alongside Reval, and extend our straight-through processing. This will include automating the process by which business units advise treasury of FX exposures and make deal requests via the web. This information will then be available immediately in treasury, avoiding the need to input this information manually and enabling timely decision-making.
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