Canadian oil producers eye hedging catch-up at $65/barrel

Wed Jun 17, 2015 8:56pm EDT
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By Nia Williams

CALGARY, Alberta (Reuters) - Canadian energy producers are giving up hoping for a big rebound in oil prices, preparing instead to embark on a course of belated hedging if crude prices edge just a few dollars higher.

    As crude markets collapsed during the first half of this year, Canada's oil producers held back on hedging on concern they would lock in prices at barely break-even rates.

    That may be about to change. A rally in U.S. crude CLc1 from $60 a barrel today to about $65 could trigger a wave of selling from Canadian companies eager to build up protection against a second price slump, according to market sources in Calgary. Many allowed their hedging activity to lapse since last year, when oil tumbled to a six-year low near $42 a barrel.

   Canadian producers are between 10 percent and 20 percent underhedged compared with the same time last year, banking sources in Canada's oil capital estimated. For example, Canadian Natural Resources Ltd (CNQ.TO: Quote) had hedged around 10 percent of its production by early May; a year earlier it had already hedged more than half its output.

    It was not immediately clear which Canadian companies were gearing up for more hedging. Dozens of them routinely use derivatives contracts such as swaps or options to provide a guaranteed price on future oil production, often to appease lenders who want secure cash flow.

Some firms may also hedge simply because they fear oil prices may fall further, potentially dropping below the cost of production in the energy-intensive oil sands, where per-barrel operating costs can top $35, according to consultancy Wood Mackenzie.

   "A lot of guys are saying we don't want to hedge at the bottom of a commodity cycle so there's been some hesitation," said Jeremy McCrea, an analyst at AltaCorp Capital in Calgary. “Clearly everyone is wishing they had hedged last year more.”

    McCrea said a number of producers were looking to hedge at around C$80 ($65) oil, and that less than half the oil companies covered by his research team have a structured hedging policy, preferring to add protection when needed.   Continued...

EnCana's Doug Shea (R) goes over drilling reports with driller Ron Webster at an EnCana gas drilling well east of Calgary, Alberta, February 15, 2007. REUTERS/Todd Korol