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Heavy-crude producers are taking advantage of stronger prices to boost financial hedges, seeking to protect cash flow before a rush of new oil sands production hits the market later this year.

Athabasca Oil Corp., Baytex Energy Corp. and MEG Energy Corp. are among those companies increasing efforts to lock in the narrow price spread between West Texas intermediate crude and Western Canadian Select (WCS), a blend of conventional heavy oil and bitumen from the oil sands.

Such financial contracts secure future sales at set prices, protecting cash flow in a falling market, although they will also limit gains should oil prices increase substantially from current levels.

Companies are moving now to lock in prices that analysts say are bound to weaken as more crude flows from the oil sands, widening the gap between WCS and the headline North American price.

WCS trades at a discount relative to U.S. oil prices because of higher processing and transportation costs. This year, that gap, known as the differential, has been compressed by temporary supply outages at the Syncrude Canada Ltd. mining and upgrading complex and strong seasonal demand from large refineries in the United States.

Meanwhile, a spiralling political and economic crisis in Venezuela has raised the prospect of a major supply disruption in that member of the Organization of the Petroleum Exporting Countries (OPEC), which could benefit Canadian companies that compete directly with Venezuela for market share in the United States.

Indeed, the relative strength of WCS prices has been a bright spot for the sector as a broader recovery falters and the Canadian dollar edges up, reducing the advantages of a weak currency, said Michael Tran, director of energy strategy at Royal Bank of Canada. Canadian producers buy services and supplies in loonies, but sell crude in U.S. greenbacks.

"That's the only thing that's gone the right way for you if you're a heavy-oil producer in Canada over the past number of months. If you were to hedge anything, that should be it," he said.

Last month, Calgary-based Baytex Energy said it had entered into hedges covering roughly 43 per cent of its net WCS differential exposure at a price of $13.88 (U.S.) for the remainder of the year, up from 38 per cent in May.

On Tuesday, WCS for August delivery fetched around $9.80 less than U.S. oil prices, broker Net Energy Inc. said, nearly half the discount at the start of the year. In Canadian dollar terms, that puts the price of a barrel at about $47.42 (Canadian). A year ago, WCS fetched around $39.19.

The energy industry has been battered by the collapse in U.S. and world oil prices from more than $100 (U.S.) a barrel in mid-2014 to about $46, with heavy-crude and oil sands producers bearing the brunt of the pain.

Earlier this year, Athabasca Oil said it had started a commodity risk-management strategy in a bid "to protect a base level of cash flow and support its capital plans."

That followed its multimillion-dollar acquisition last year of oil sands assets from Norway's Statoil ASA, which increased its exposure to heavy-crude prices.

In May, Athabasca said it aimed to hedge a minimum of 20,000 barrels a day for 2017, including 13,000 barrels of WCS at roughly $53 (Canadian) while locking in the differential on an additional 7,000 barrels at roughly $14.75 (U.S.)

Oil sands producer MEG Energy has also boosted hedges. Since March 31, it has locked in a fixed differential on 8,000 barrels a day at an average price of $14.43, plus another 14,600 barrels at $14.64, according to financial statements.

The moves come as a series of multibillion-dollar oil sands projects that started construction before the downturn near completion, promising to uncork a flood of new supply in a market already struggling to with pipeline bottlenecks.

The new projects include Suncor Energy Inc.'s massive Fort Hills mining operation and Canadian Natural Resources Ltd.'s expanding Horizon complex. They are set to start up later this year just as U.S. refineries begin seasonal maintenance, reducing demand for the extra-heavy crude.

Barring a big supply disruption from Venezuela, that will weigh on prices, said Martin King, analyst at GMP FirstEnergy in Calgary.

"Presumably at some point you're going to start bumping up against pipeline constraints again by the end of the year and you'll have to move those barrels by rail, and that's going to take a wider differential to get them on the rails," he said.

The technology at an Alberta oil sands mine near Fort McMurray has evolved since it opened almost 50 years ago. Gary Bunio of Suncor Energy explains how 850-tonne bucketwheel trucks were once used to extract crude oil.

The Canadian Press

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:00pm EDT.

SymbolName% changeLast
ATH-T
Athabasca Oil Corp
+0.58%5.23
BTE-T
Baytex Energy Corp
+2.52%4.89
BTE-N
Baytex Energy Corp
+3.71%3.63
MEG-T
Meg Energy Corp
+0.81%31.1

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