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Encana says it hedged 10,000 barrels per day of expected 2017 oil production through the first quarter at an average fixed price of $50.86 per barrel.Todd Korol/The Globe and Mail

Debt-hobbled oil producers are boosting financial hedges to top up paltry cash flow, taking advantage of a rally that has pushed U.S. crude above $40 (U.S.) a barrel.

Encana Corp. and Baytex Energy Corp. are among companies that have locked in higher prices for future output in hopes of cushioning the blow of oil's collapse from more than $100 a barrel in mid-2014.

Encana on Tuesday said it hedged 10,000 barrels per day of expected 2017 oil production through the first quarter at an average fixed price of $50.86 per barrel, while adding to contracts already in place that cover three-quarters of its anticipated crude output this year. That includes 55,000 barrels a day of expected production hedged under fixed-price contracts at $55.61 per barrel. It also said 85 per cent of its expected 2016 natural gas production is hedged, up from 75 per cent previously, as the company seeks shelter from persistently weak prices.

Baytex has a portion of its output this year locked in at an average sales price of $62.03 per barrel. The company has also entered into various complex hedging arrangements for this year that guarantee higher prices when U.S. crude sinks below $40, but also limit gains at $60 per barrel. Similar hedges are in place for 2017, it said on Tuesday.

Such contracts represent an insurance policy against still-choppy oil markets. Producers are locking in prices for future output that not long ago would have seemed incredibly bearish, a sign of growing desperation as they struggle to mend finances tattered by the sustained slump in energy prices.

"If you're there to protect cash flows and to service debt and maybe maintain a decent balance sheet for the second half of the year, it's probably the prudent thing to do," said FirstEnergy Capital Corp. analyst Martin King in Calgary. "But I don't think they take that money and put it into the field and start drilling again."

Mr. King on Tuesday bumped his estimate for WTI oil this year from $37.25 to $40.41 a barrel, citing an improving supply-demand balance as producer cutbacks bear fruit and demand for cheaper crude accelerates. His estimate for 2017 remained unchanged at $55 a barrel.

On Tuesday, the U.S. benchmark price skidded $1.13 to $43.65 per barrel. It retreated on news that top exporters in the Middle East were increasing exports, a strengthening greenback, and expectations of a big build in U.S. stockpiles on Wednesday.

In the first quarter, Calgary-based Encana said it lost $379-million, overshadowing deep cost reductions at its main operating regions. The results compared to a $1.7-billion loss in the same period a year ago.

The company was hurt by a $607-million impairment and sharp declines in oil and natural gas prices. Its cash flow plunged by nearly 80 per cent from a year ago, to $102-million. Encana shares dropped 10.5 per cent in Tuesday trading on the Toronto Stock Exchange.

Under chief executive officer Doug Suttles, the company has cut staffing levels by more than 50 per cent, slashed its dividend, and sought to reduce drilling costs in its key operating areas.

In the quarter, the company said those costs fell by between 22 per cent and 44 per cent compared to average levels in 2015. In a bid to cut debt, the company in March repurchased $400-million of longer-dated senior notes, a move it said would result in $30-million in annual interest-payment savings.

Baytex in March said its credit facility was chopped by 30 per cent to $575-million. On Tuesday, it said its first-quarter profit was $607,000 (Canadian), compared to a $175.9-million loss a year ago. Cash flow tumbled to about $45-million from roughly $160-million in the first quarter last year. Its net debt stands at $1.9-billion.

In a bullish sign, the company said it is looking to restart some heavy-oil volumes it shut off earlier this year as crude prices fell.

Chief executive officer James Bowzer said he would look to boost hedges should prices rise from current levels. The idea is "to participate in an upside to $60 while providing some protection in the mid-$40s range, is really what we've been doing," he told analysts.

With a report from Jeffrey Jones in Calgary

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 18/03/24 4:00pm EDT.

SymbolName% changeLast
BTE-N
Baytex Energy Corp
+1.2%3.38
BTE-T
Baytex Energy Corp
+1.33%4.56

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