Cenovus plans for more robust hedging during its asset sales process

Image: Joey Podlubny/JWN

Cenovus Energy plans to bulk up its hedging program as it undertakes to shed non-core assets following its blockbuster $17.7 billion acquisition from ConocoPhillips in March.

Cenovus says its underlying hedging strategy hasn’t changed, however, its board of directors has provided approval to hedge up to 75 per cent of forecast crude oil volumes this year and in 2018.

This is up from 50 per cent prior to Cenovus’ acquisition of ConocoPhillips’ 50 percent stake in the Foster Creek and Christina Lake oilsands ventures, as well as most of ConocoPhillips’ conventional assets in the Deep Basin of Alberta and British Columbia.

“Locking in hedges while you trying to sell assets provides an additional level of risk mitigation,” says Cenovus spokesman Steven Murray.

Amir Arif, an analyst with Cormark Securities, says it is a prudent step.

“Cenovus went from having one of the cleanest balance sheets to being one of the most levered large-cap names post the deal,” Arif wrote in an email to JWN.

“Unfortunately the softening in the oil market doesn't help the leverage metrics. Therefore, although the 2018 strip is lower than at the time of the deal, it is prudent for the company to reduce the risk with more hedges so the increased hedging makes sense.”

As of June 15, Cenovus had hedges in place on approximately 143,000 bbls/d of crude oil for the remainder of this year at an average floor price of about US$51.50/bbl. It also had 50,000 bbls/d of crude oil hedged for the first half of 2018 with an average floor price of approximately US$49.70/bbl.

The current volume under hedge represents only about 30 per cent of the “implied midpoint of our second half production,” according to Murray.

So why bother raising the hedge ceiling if there is still plenty of room below the previous 50 per cent level?

“If and when you see the opportunity in the market, you can take advantage of that and lock in. Since you can’t go above the ceiling without board approval, you want to have the option of going above it if you see the right opportunity,” Murray says.

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