RE:Should BXE hedge US Dollar exposure?CanadianBuck wrote:
BXE recently did a $250 million US dollar bond issue. ON IV they were criticizing management for not hedging the currency risk. My question to them and this board is this. If you are bullish longer term on oil & gas prices and you believe the Canadian dollar will rally when commodity prices improve (as I do) , why should they hedge? Any thoughts? Nice to see BXE doing better than the peer group today.GLTA
<warning fairly long rant>
Hi,
I am in the camp that they should have (and should already have) currency risk migitation in place. What they are doing right now by not having hadges is simply gambling with shareholder money. And the risk/reward ratio is horrible.
Fact: No one knows for *sure* where the USD/CDN dollar will be a few years out. Many have predications, but we don't know who's predictions are right and who's are wrong.
If Canadian housing has a correction or crashes, (like many big money/smar money people are betting), we could have a .50 USD cent CDN dollar when the principal is due.
Also, if oil and gas prices (heaven forbid) are still low in a few years (previous oil crashes have taken an average of 8 years for the price to come back) the CDN dollar could be much weaker than it is now.
The risk scenario: When the principal is due, oil and gas prices are still low, so BXE's profit margins are poor, and the CDN dollar is down (likely scenario if oil and gas are low), so the USD debt is magnified in the CDN dollars. It would wipe out BXE, and we risk having nothing.
The reward scenario: Oil and gas price shoot back up and the CDN dollar is strong. No issues here. The debt is easy to pay off, BXE has large profits, and they get a small boost with the "win" in the currency FX. The price of having hedged would be virtual an immaterial expense, because BXE would be a cash cow generating machine.
So why the heck wouldn't they hedge to reduce (or elimnate) the currency risk. Not hedging is a horrible risk. If they end up needing the hedging it is a life saver for the company, and if they don't need it the worse case is that they have a small extra expense.
And for people that *are sure* the CDN dollar will not be lower a few years out, remember that many big hedge funds and "smart money" people are betting on a CDN housing correction or crash. If that happens the CDN could be much lower. Secondly the average time for oil prices to recovery from past crashes is somwhere around 8 years. So it is quite possible that our oil is low for many more years before it recovers which likely means a low CDN dollar.
In my opinion not hedging is almost criminally negligent, considering the risk to the company.
The only reason not to hedge is if it is rediciously expensive to buy hedges right now. But even then, they should be hedging some of the debt, and have a plan to increase the hedging when they can do so at lower cost.
-Kman