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Corporate hedging too thorny for some Canadian Natural Resources posts big market loss; other large Canadian producers abandon practice or try a different approach Gary Park Petroleum News Calgary Correspondent
Corporate hedging programs seem to have friends and foes in about equal numbers in the oil and gas sector, underscoring a belief that companies can’t win, no matter how hard they try.
For Canadian companies, which have tended to limit their hedging strategies, the damned-if-you-do, damned-if-you-don’t attitude has seen many large producers — EnCana, Husky Energy, Suncor Energy — phase out or abandon the practice altogether, or try other tactics.
They have probably felt vindicated in these days of heady prices and may have taken some comfort from what happened to Canadian Natural Resources, which posted a market loss of C$679 million in the first quarter.
But even the toughest critics have spared CNQ (Canadian Natural Resources’ stock symbol), which is proceeding with the most expensive single oil sands project to date — its C$10.8 billion Horizon venture. CNQ board amended policy To buy some insurance against wild swings in commodity prices and ensure enough free cash flow to finance Horizon, CNQ’s board of directors amended the company’s hedge policy in the first quarter, authorizing management to hedge up to 75 percent of estimated production for 12 months, 50 percent for the next 12 months and 25 percent for the final 48 months.
Based on the policy, 70 percent of 2005 and 50 percent of 2006 crude oil volumes, plus 67 percent of 2005 and 40 percent of 2006 gas volumes, were hedged through the use of cost collars.
CNQ assumed average 2005 commodity pricing of US$54 per barrel for West Texas Intermediate and C$7.50 per thousand cubic feet of AECO gas.
Its decision to book the after-tax hedging expense of C$679 million reflected the paper loss of the hedge contracts through the end of 2006, based on commodity prices as of March 31.
But, while anticipating its 2005 profit will be trimmed, CNQ is counting on its cash flow climbing from about C$4.7 billion to C$5.1 billion, thus helping to achieve its basic objective of keeping Horizon “on budget and on schedule.”
Despite the size of CNQ’s market losses, investors appeared to take the news in stride, showing no desire to punish the company on the Toronto Stock Exchange. Some walk away from hedging However, CNQ’s Canadian peers, many of them unwilling to face a chorus of discontent when they deliver the bad news on hedging, are passing up the chance to renew hedges.
Husky walked away from the program after reporting net losses of C$376 million last year, and saw its first quarter profit climb this year to C$384 million from C$255 million a year earlier, when it lost C$74 million on hedges.
EnCana’s 2004 cash flow was drained of a possible US$700 million because of hedges, prompting the company to buy contracts to shield it from a slump in oil and gas prices, while benefiting from sustained high prices.
The big independent said in February that the hedging impact of 2004 is “expected to wane in 2005.”
Suncor, which recorded after-tax hedging losses of C$410 million in 2004, has no plans for further hedges once its program covering 36,000 barrels per day at $23 per barrel expires at the end of 2005.
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