Oil prices stuck below $48 (U.S.) a barrel are rough on the energy industry, so some domestic companies have decided to take in as much as $90 (Canadian) instead.
Crude's gyrations have a major impact on Canada's currency, and as the price of oil has tumbled since last year, the loonie has lost ground against the U.S. dollar. Savvy hedging of both the commodity and the currency has allowed some producers higher nominal Canadian-dollar prices to protect their cash flow. That lets them maintain dividends and even consider using their shares for acquisitions.
"As a company ourselves, we have a huge advantage over U.S. guys because of the Canadian dollar exchange," said Scott Saxberg, chief executive of Crescent Point Energy Corp.
Crescent Point has oil and currency hedges in place that value more than half of its crude production at $89 a barrel for this year. Near-month U.S. benchmark West Texas intermediate crude settled at $47.05 (U.S.) a barrel on the New York Mercantile Exchange on Thursday, and few analysts see international prices roaring back to the levels of last summer any time soon.
Oil-price protection through risk management means Crescent Point has no need to chop its dividend, even though the company was offering a high yield driven by recent pressure on its stock price, Mr. Saxberg said in an interview at First Energy Capital Corp.'s energy conference in New York. Several Canadian energy players have reduced their payouts in response to falling cash flow, some of them more than once. Others fear breaching the terms of their debt.
"Our strategy has always been to protect our dividends through our hedge program, and our balance sheet," he said. "We're 56-per-cent hedged all the way through this year. Last year, we were 60-per-cent hedged when the downturn started. So for a year and a half, we're protected in this downturn."
It's a dichotomy in a downturn that benefits the energy sector in Canada, which buys supplies and services in Canadian dollars and sells its output in greenbacks.
"When the exchange rate goes down, that's essentially boosting the Canadian-dollar-realized price of that crude or natural gas, so if the depreciation continued, you'd keep getting more of an uplift," FirstEnergy analyst Martin King said.
According to Mr. King's numbers, every 5-cent change in the U.S. dollar value of the Canadian currency is worth $3 (Canadian) a barrel of crude oil and 20 cents per thousand cubic feet of natural gas.
Even without locking in oil prices at higher levels, U.S. crude in Canadian dollar terms settled at nearly $60 on Thursday.
Companies that hedge their currency at lower exchange rates than the prevailing one get even more of a benefit, he said.
Whitecap Resources Inc. has hedges in place covering 63 per cent of its oil production at more than $96 a barrel in the first quarter of this year. In the second quarter, 43 per cent of its output fetches more than $90 a barrel.
Whitecap expects cash flow to drop by more than $80-million this year versus 2014, but has not reduced its dividend. The currency and commodity hedges will likely keep the dividend intact, said Whitecap CEO Grant Fagerheim.
"It didn't make that much of a difference when oil was trading between $90 and $95 (U.S.) because the Canadian dollar was trading pretty close to par," Mr. Fagerheim said. "But now when you've got a big 20- to 25-per-cent difference in the Canadian dollar, it's a very different and important factor."
With exchange rates locked in over the next few years, the company also protects itself for any negative impact of a commodity recovery; a lift in oil prices will likely push up the value of the Canadian dollar as well, reducing that advantage, he said.