More pain looming for Canadian oil producers as hedges shielding them from oil rout expire

A defence Canadian oil producers had from the plunging cost of crude is crumbling as hedges expire amid projections that crude continues to say no.

Hedges that shielded companies such as Crescent Point Energy Corp. and Whitecap Resources Inc. from the full pain of US$30 oil are winding down this season and then. Nineteen small-to-mid-sized producers have an average of 19 per cent of the crude hedged at approximately US$58 a barrel this year, and just 3 per cent at approximately 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 same companies this past year.

“When you appear to the coming year and beyond so that as far as the eye can easily 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 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 charges cuts, including dividends, as the brunt from the downturn hits. “While in 2015 producers still had a bit of an advantage of hedging on their own books, whenever you roll into 2016 and beyond this is when the pain is going to be felt,” Tran said.

Related

More job losses, dividend cuts and red ink: Oilpatch kicks off earnings’ season today and it ain’t prettyOil prices beginning with ‘One’ might be with us soon as crude tanks to 12-year lows


Well Protected

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 Countries raised production to maintain 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 in the third quarter, after reducing forecasts for this year up to 51 percent.

Crescent Point’s oil hedges drop to 29 per cent at approximately US$60 a barrel this year, from 44 percent at US$69 this past year, CIBC data show. Its gas hedges fall to 30 percent from 33 percent. Whitecap’s oil hedges fall to 14 percent this season at US$64 a barrel, from 47 per cent 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 last year and also the “longer we remain in US$30 to US$35 environment, the more this cost structure can come down,” he explained. Hedges put on in 2018 could be brought forward to 2017, should prices stay low until then.

Dividend Focus

Whitecap has cut its capital budget for this season by more than half to US$70 million to cope with affordable prices, and has positioned its dividend to be 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 marketplace 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 percent previously year compared with a 35 percent decline for the 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 percent hedged for this year at $80 a barrel after 2015, Chief Financial Officer Ivor Ruste said inside a conference call in December.

Best-Hedged

Oil producers with dividends to pay often hedge their oil and gas years in advance to ensure 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 year among the companies taught in CIBC data. Pengrowth has 58 percent of their oil hedged at approximately US$66 a barrel with this year, based on the CIBC estimates. Northern Blizzard will sell 61 per cent of its crude at about $55 a barrel. The coming 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 set up in 2013 and 2014 to “ensure cash-flow stability” because 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 present level of oil prices, there is no need to enter any extra hedges at this time.”

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 could have a harder time.

“Those hedges appear in 2017, 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