BMO reports big natural gas trading losses
Bank says losses could reach C$450 mln; to hit second-quarter results

By Alistair Barr, MarketWatch

Last Update: 12:53 PM ET Apr 27, 2007

SAN FRANCISCO (MarketWatch) - BMO Financial Group, one of the largest banks in Canada, said on Friday that it may lose as much as C$450 million from natural gas trades that went awry, becoming the latest casualty of this unpredictable commodity.
Mark-to-market commodity trading losses of between C$350 million and C$450 million ($313 million to $403 million), pre-tax, will be recorded in the second quarter of BMO's 2007 fiscal year, the company estimated in a statement.
That will knock 45 cents to 55 cents a share off second-quarter earnings, which are due to be announced on May 23, the bank added.
Energy trading has become a hot strategy among hedge funds and investment banks in recent years. However, several players have been hit by big losses, including Amaranth Advisors LLC, MotherRock LP and Ritchie Capital Management. Natural gas trading has been especially troublesome, partly because it can be more volatile and less liquid than other commodities. See full story.
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4:02pm 04/27/2007

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BMO62.70, -0.83, -1.3%) (CA:BMO: news, chart, profile) said on Friday that its energy trading positions, which were mainly in natural gas, suffered as the market became increasingly illiquid and volatility dropped to historically low levels. The bank said it also changed the way it estimated the market value of the portfolio.
"The commodity trading losses were the result of decisions that did not adequately recognize the vulnerability of the portfolio to changes in market volatility," Bill Downe, chief ????utive of BMO Financial Group, said in a statement. "We are conducting a thorough review and actions have been taken to address the current situation and reduce the likelihood of a recurrence."
Natural gas prices are usually more volatile during the first few months of the year as traders respond to winter weather changes and the outlook for hurricanes and summer heat later on in the year. But this year, natural gas prices haven't moved as much as usual.
Natural gas futures ended 2006 at roughly $6.30 per British Thermal Unit (BTU). The commodity traded at $7.78 on Friday, up 2.3%. At the end of 2005, natural gas futures were above $11 in the wake of Hurricane Katrina and other storms that disrupted supply.
BMO said it will continue to reposition its portfolio to a "lower and sustainable level" and warned that this re-jigging could trigger more losses or some gains, depending on market conditions. But any further losses will be much smaller than those disclosed on Friday, the bank added.
The losses won't prevent BMO from pursuing its strategic goals, the bank noted.
BMO shares slid less than 1% to $62.93 on Friday. The stock is up more than 6% so far this year.

Alistair Barr is a reporter for MarketWatch in San Francisco.