Oilpatch losing key shield as hedges expire
Continuing low prices could be difficult: analyst
A defence Calgary oil producers had against the plunging price of crude is crumbling as hedges expire amid projections that crude will continue to decline.
Hedges t hat s hielded companies such as Crescent Point Energy Corp. and Whitecap Resources Inc. from the full pain of US$ 30 oil are winding down this year and next. Nineteen small- t o midsized producers have an average of 19 per cent of their crude hedged at about US$ 58 a barrel this year, and only three per cent at about 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 same companies last year.
“When you look out to next year and beyond and as far as the eye can see, producers are fairly naked when it comes to price protection,” Michael Tran, commodities strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York, said in a June 19 phone interview. They “are fully exposed to oil prices when it hurts the most.”
The reduced hedging may prompt companies to accelerate output and cost cuts, including dividends, as the brunt of the downturn hits. “While in 2015 producers still had somewhat of an advantage of hedging on their books, when you roll into 2016 and beyond that’s when the pain will be felt,” Tran said.
Oil has plunged to under US$27 a barrel in New York, from near US$108 a barrel in 2014, as the Organization of Petroleum Exporting Coun- tries raised production to maintain market share amid a surge in North American output. Analysts from Royal Bank of Canada to Credit Suisse Group AG have cut price projections. Morgan Stanley expects Brent crude to average US$30 in the third quarter, after reducing forecasts for this year by as much as 51 per cent.
Crescent Point’s oil hedges drop to 29 per cent at about US$ 60 a barrel this year, from 44 per cent at US$ 69 last year, CIBC data show. Its gas hedges fall to 30 per cent from 33 per cent. Whitecap’s oil hedges fall to 14 per cent this year at US$ 64 a barrel, from 47 per cent last year at US$74 a barrel.
Crescent Point is “well protected” with hedges in 2016, Trent Stangl, vicepresident of investor relations, said in a phone interview. The company brought costs down 30 per cent last year and the “longer we stay in US$ 30 to US$ 35 environment, the more this cost structure will come down,” he said.
Whitecap has cut its capital budget for this year by more than half to US$ 70 million to cope with lower prices, and has positioned its dividend to be sustainable at US$ 45 oil next year, chairman Grant Fagerheim said in a phone interview Tuesday.
Selling oil at a lower price may prompt Crescent Point to trim its dividend, Cody Kwong, analyst at FirstEnergy Capital Corp., said by phone from Calgary.
“In this environment, I think 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, according to data compiled by Bloomberg. The stock has dropped 58 per cent in the past year compared with a 35- percent decline for the Standard & Poor’s/ TSX composite energy index.
Cenovus Energy Inc., an oilsands producer, said Thursday 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 for this year at $ 80 a barrel at the end of 2015, chief financial officer Ivor Ruste said in a conference call in December.
Oil producers with dividends to pay often hedge their oil and gas years in advance to ensure they can make payments, Dennis Fong, a Calgary- based analyst at Canaccord Genuity Corp., said in a Jan. 25 phone interview.
Northern Blizzard Resources Inc. and Pengrowth Energy Corp. are the two most- hedged producers this year among the companies covered by the CIBC data. Pengrowth has 58 per cent of its oil hedged at about US$ 66 a barrel for this year, according to the CIBC estimates. Northern Blizzard will sell 61 per cent of its crude at about US$ 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 per cent at about US$64 a barrel.
Pengrowth’s hedging program was put in place 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 email. While the company has oil hedges extending into 2018, “given the current level of oil prices, there is no desire 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 in a phone interview. “They will definitely be able to ride out 2016 because of 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 in a difficult positions,” Kyle Preston, National Bank Financial analyst, said in a Jan. 15 phone interview.
FAIRLY NAKED WHEN IT COMES TO PRICE PROTECTION.