Stock Watch Energy Today via loonietunes on the AAV Board Here in Canada, the big energy newsmaker was the oil sands producer Cenovus Energy Inc. (CVE), up 44 cents to $21.63 on 9.25 million shares. It announced this morning that it is suspending its oil hedging program. Hedging is a common industry practice by which companies lock in prices for some of their production, thus cushioning themselves against sudden price declines. Yet when prices rise, as they have done lately, those companies find themselves on the wrong end of the bat. Cenovus estimated today that it will post hedging losses of $970-million for the first quarter, with another $410-million in projected losses for the current quarter.
Cenovus is not the first to make this kind of announcement this year. U.S. shale major Pioneer Natural Resources Co. kicked off the trend in early January, announcing that it would unwind its hedges for 2022, even though it would have to pay $328-million (U.S.) to back out of the contracts. (To put that number in perspective, its hedging losses in the first three quarters of 2021 had surpassed $2-billion (U.S.).) Hess Corp. followed suit and ditched hedges last month at a cost of $325-million (U.S.). Other companies, such as Canada's MEG Energy Corp. (MEG: $17.79), have emphasized that they are simply not entering hedges that they normally would, so as to stay unencumbered.
Like the above companies, Cenovus saw its investors shrug off the short-term costs and focus on the implied long-term bullishness. Once Cenovus dumps its hedges, it will have greater exposure to oil prices that it expects to keep strengthening. "[The company] expects to have no significant financial exposure to [its hedging] positions beyond the second quarter of 2022," it declared in today's press release. As if to give investors extra reason to smile through the pain, it also promised that when it releases its first quarter financials on April 27 -- complete with their big hedging loss -- it will also release "details on its plan for increasing shareholder returns." (The company currently pays a 3.5-cent quarterly dividend, for an uncompetitive yield of 0.6 per cent.)