A defence Canadian oil producers had from the plunging price of crude is crumbling as hedges expire amid projections that crude continues to decline.
Hedges that shielded companies for example Crescent Point Energy Corp. and Whitecap Resources Inc. in the full pain of US$30 oil are winding down this season and next. Nineteen small-to-mid-sized producers come with an average of 19 per cent of their crude hedged at approximately US$58 a barrel this year, and only 3 per cent at about around the same price in 2017, according to data from Canadian Imperial Bank of Commerce. That compares with 27 per cent at US$71 for the similar companies last year.
“When you appear to next year and beyond and as far as the eye can easily see, producers are fairly naked with regards to price protection,” Michael Tran, commodities strategist at Royal Bank of Canada’s RBC Capital Markets unit in Ny, said inside a June 19 phone interview. They “are fully exposed to oil prices if this hurts the most.”
The reduced hedging may prompt companies to accelerate output and costs cuts, including dividends, as the brunt from the downturn hits. “While in 2015 producers still had somewhat of the advantage of hedging on their books, whenever you roll into 2016 and beyond this is when the pain will be felt,” Tran said.
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Well Protected
Oil has plunged to under US$27 a barrel in Ny, from near US$108 a barrel in 2014, as the Organization of Petroleum Exporting Countries raised production to keep share of the market amid an outburst in United states output. Analysts from Royal Bank of Canada to Credit Suisse Group AG have cut price projections. Morgan Stanley expects Brent crude to average $30 within the third quarter, after reducing forecasts with this year by as much as 51 per cent.
Crescent Point’s oil hedges drop to 29 per cent at about US$60 a barrel this season, from 44 per cent at US$69 this past year, CIBC data show. Its gas hedges fall to 30 per cent from 33 percent. Whitecap’s oil hedges fall to 14 per cent this season at US$64 a barrel, from 47 percent this past year at US$74 a barrel.
Crescent Point is “well protected” with hedges in 2016, Trent Stangl, v . p . of inventor relations, said inside a phone interview. The company brought costs down 30 per cent this past year and the “longer we remain in US$30 to US$35 environment, the greater this cost structure can come down,” he explained. Hedges put on in 2018 could be brought toward 2017, should prices stay low for now.
Dividend Focus
Whitecap has cut its capital budget for this season by over fifty percent to US$70 million to deal with lower prices, and has positioned its dividend to become sustainable at US$45 oil next year, Chairman Grant B Fagerheim said inside a phone interview Tuesday.
Selling oil for less money may prompt Crescent Indicate trim its dividend, Cody Kwong, analyst at FirstEnergy Capital Corp., said by phone from Calgary.
“In this environment, I believe the market would take that as a positive note,” said Kwong, who rates Crescent Point as his “top pick.” The company is rated “buy” by 18 of 24 analysts, based on data compiled by Bloomberg. The stock has dropped 58 percent in the past year compared with a 35 per cent decline for that Standard & Poor’s/TSX Composite energy index.
Cenovus Energy Inc, an oil sands producer, said today it had about 24 per cent of its oil output hedged for the rest of 2016 at $72.31 a barrel after adding new positions. The company was 15 per cent hedged with this year at $80 a barrel at the end of 2015, Chief Financial Officer Ivor Ruste said inside a business call in December.
Best-Hedged
Oil producers with dividends to pay often hedge their gas and oil years ahead of time to make sure they are able to make payments, Dennis Fong, a Calgary-based analyst at Canaccord Genuity Corp., said inside a Jan. 25 phone interview.
Northern Blizzard Resources Inc. and Pengrowth Energy Corp. would be the two most-hedged producers this season one of the companies taught in CIBC data. Pengrowth has 58 percent of its oil hedged at approximately US$66 a barrel for this year, according to the CIBC estimates. Northern Blizzard will sell 61 per cent of its crude at approximately $55 a barrel. Next year, Pengrowth’s oil hedges drop to 11 per cent at US$59 a barrel. Northern Blizzard’s also fall to 11 percent at approximately US$64 a barrel.
Pengrowth’s hedging program was set up in 2013 and 2014 to “ensure cash-flow stability” as the company built its Lindbergh oilsands project, company spokesman Wassem Khalil said in a Feb. 8 e-mail. While the company has oil hedges extending into 2018, “given the current degree of oil prices, there is no need to enter into any additional hedges at this point.”
For Pengrowth, the hedges are “a big, big lifeline,” Nima Billou, Veritas Investment Research Corp. analyst, said inside a phone interview. “They will definitely be able to ride out 2016 due to these hedges.”
The industry as whole may have a harder time.
“Those hedges come off in 2017, and with these oil prices continuing to fall, they could be inside a difficult positions,” Kyle Preston, National Bank Financial analyst, said in a Jan. 15 phone interview.
Bloomberg News
