CALGARY – A big, bad bet on oil prices hurt Cenovus Energy Inc. on Wednesday, as the oilsands producer posted a massive net loss thanks in part to a hedging program that the company vowed never to repeat.
“I don’t think you will ever see this company hedge at the very high levels that you’ve seen this year and in the back half of last year,” Cenovus president and CEO Alex Pourbaix said in an interview, after his company announced a $914 million net loss for the first quarter.
A big part of that net loss can be attributed to its hedging program that led to a $469 million risk management loss.
Calgary-based Cenovus hedged 80 per cent of its oil production in the first half of this year to oil prices that range between US$45.30 at the low end and US$62.77 per barrel at the high end. By contrast, West Texas Intermediate oil prices only dipped below US$60 per barrel for one week in the middle of February and hit US$68 per barrel in mid-day trading Wednesday.
“I suspect the reason that previous management did this was because, of course, they had undertaken a ton of debt and wanted to fix the numbers,” said Len Racioppo, managing director of Coerente Capital Management Inc., which owns almost 700,000 Cenovus shares.
Racioppo vocally opposed Cenvous’ $17.7-billion deal to buy assets from ConocoPhillips Canada last year, which he said saddled the oilsands producer with too much debt and should have been subject to a shareholder vote given the dilution of the shares.
The deal more than doubled the company’s production, which in the first quarter rose to 487,464 barrels of oil equivalent per day, up 164 per cent from 184,001 bpd at the same time a year earlier.
The company also indicated on an earnings call Wednesday that it could scale back further production growth, including at a 50,000 bpd under-construction oilsands project, if new export pipelines are not built to carry oil out of Alberta.
“From a pipeline perspective, I remain an optimist that most if not all of the three major projects would go,” Pourbaix said of Kinder Morgan Canada’s Trans Mountain pipeline expansion, TransCanada Corp.s’ Keystone XL pipeline and Enbridge Inc.’s Line 3.
“In the interim, as production grows in Alberta, we obviously are going to need rail,” he said.
Pourbaix would not say how much oil Cenovus is shipping by rail at the moment, but indicated the company is scaling up. The lack of pipeline capacity and challenges securing railway cars has led to large discounts for Canadian oil, which also impacted Cenovus’ hedging program in the first quarter.
Canaccord Genuity analyst Dennis Fong said Cenovus’ hedging program was understandable given the need to manage the company’s debt obligations. “The way to think of it was for downside protection in that type of a scenario,” Fong said.
In the future, Pourbaix said the best way for Cenovus to manage through volatile commodity prices – including volatile swings in the discounts Canadian oil producers accept for their crude relative to WTI – is to deleverage.
“I’m very, very focused on paying down our debt,” Pourbaix said, adding that was also priority for the rest of the new-look management team.
Pourbaix took over from previous CEO Brian Ferguson six months ago and has since overhauled the company’s executive team. The company hired new chief financial officer Jonathan McKenzie away from competitor Husky Energy Inc. to replace Ivor Ruste, who is retiring at the end of the month.
But Pourbaix denied that changes at the executive level were a result of the problems with its hedging program. He said he was looking for a CFO that would stay with the company over the long-term and that McKenzie “has a great deal of runway in front of him.”
The company has also put up two other Calgary oilpatch veterans to join its board of directors, which angry shareholders has also said is in need of renewal.
Shareholders will vote on adding Keith MacPhail, the executive chairman at Bonavista Energy Corp. and chairman of NuVista Energy Ltd., and former TransCanada Corp. and Taliman Energy Inc. CEO Hal Kvisle to the company’s board.
“I wish they’d change more board members. They probably should have. Other companies that have done terrible deals and transactions have done more,” Racioppo said.