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Cdn. Natural posts huge loss from hedging


Date: Friday, April 22, 2005
Author: Globe & Mail

Calgary Canadian Natural Resources Ltd. said yesterday that it booked an eye-popping $679-million loss on its hedging program for the first quarter, but oil patch firms say this kind of red accounting ink is likely to become less common in the sector as hedging strategies shift.

Canadian Natural has put in place an extensive series of hedges on about two-thirds of its production this year as part of a conservative strategy to ensure steady cash flow as it begins building the first stage of its massive $10.8-billion oil sands project. Hedging protects energy companies from a precipitous decline in oil and gas prices but can result in missed profits if prices rise.

Hedging is "very prudent" for Canadian Natural, said company spokesman Corey Bieber.

Canadian oil and gas players generally don't hedge production, except in the few cases where a company is moving on some large growth push. And the few names in the oil patch that did use hedges, such as Husky Energy Inc., Suncor Energy Inc. and EnCana Corp., are cutting back or have stopped completely.

"Canadian Natural is without a doubt an anomaly," said Tom Ebbern, co-head of research at Tristone Capital Inc., adding that most exploration and production companies are "virtually unhedged."

Mr. Ebbern said companies that have hedged have not fared well.

"For the last three years, crude's been on a continual rise," he said. "Anyone who has hedged has booked significant losses, year-in and year-out."

For Husky, abandoning a hedge program helped the company to increase its profit in the first quarter to $384-million from $255-million. A year ago, Husky lost $74-million on hedges and the absence this year of that red ink accounted for 57 per cent of its profit gain.

In all of 2004, Husky had net losses of $376-million on hedging, massively up from a loss of only $17-million in 2003. The increase was the main reason Husky profit in 2004 plunged 24 per cent to $1.01-billion from $1.33-billion.

EnCana, the country's biggest oil and gas company, has cut down on its hedging program for 2005 after booking large losses in 2004, when its hedges reduced the company's cash flow by $700-million (U.S.).

"Hedging impact [is] expected to wane in 2005," EnCana said when it issued full-year 2004 results in February.

EnCana has also decided to engage in a different type of hedging, buying contracts to protect it from a crash in oil and gas prices that also allow the company to benefit somewhat if prices stay high. The use of "puts" and "collars" to achieve this goal is something of a new trend in oil patch hedging in Canada and is being used by Canadian Natural as well.

Canadian Natural's after-tax hedging loss of $679-million for the first quarter reflects the paper loss of the hedge contracts through the end of 2006, based on commodity prices as of March 31. The Canadian Natural board of directors in January approved an expansion of the company's hedge program and yesterday the company said it wasn't planning changes.

Because of hedging losses, as well as accounting for stock options, Canadian Natural predicted its profit this year will be about $1.6-billion (Canadian), less than the $1.8-billion predicted last November.

While profit is expected to come in lower, cash flow is doing better than forecast last November, when Canadian Natural predicted about $4.7-billion for 2005, based on an oil price of $42.50 (U.S.) a barrel.

Canadian Natural now thinks cash flow could reach as much as $5.1-billion (Canadian), assuming oil stays above $50 (U.S.) a barrel.

Stock of Canadian Natural closed at $66.37 on the Toronto Stock Exchange yesterday, down 62 cents or 0.9 per cent. It has climbed 29.5 per cent this year.

The Calgary company's Horizon oil sands project was 2 per cent complete as of March 31 and is expected be 6 per cent done by the end of June.

It is "on budget and on schedule," the company said.