Deep Dive ... US$ DebtThe US$ debt is a concern to me. Anyone who borrows in another country's currency is speculating in currency unless they hedge their position 100%. It usually leads to tears. In Europe a few years ago, house purchasers in Hungary and Poland were getting their mortgage from Swiss Banks denominated in SFR, not EUR, because Swiss interest rates were lower. Then the Swiss Central Bank decided to stop pegging the SFR to the EUR. Now a lot of Hungarians and Poles are underwater on their house.
Bonavista started borrowing in USD on 2010-Jun-04 and finished on 2013-May-23. You can read the borrowing agreements with the lenders by going to Sedar.com and searching on "Other Material Contracts". The name of the lender is not explicit, but I did see "Prudential" mentioned, where is could only mean this was the lender. So I suspect it is the Prudential Insurance Company in the US. Why Bonavista had to borrow in USD is not clear to me. Maybe so soon after the Financial Crisis, this was the only available debt at reasonable prices.
There is no requirement in the Debt Agreement that Bonavista hedge their gas production prices. It only says Bonavista cannot speculate in futures beyond following the Board of Director's limits on the hedging program.
Here is my issue: At the time of the 2010 borrowing, the USD/CAD rate was near par (95 cents, compared with 75 cents today). By 2013, it was 97 cents. This means if Bonavista borrowed about US$500m in 2013, they owe C$515m then, and C$670m now. Bonavista eats a C$155m currency speculation loss over time.
From the 2013 Annual Report: "This long-term, low cost debt is mainly US dollar denominated of which, US$100 million has been hedged using foreign exchange contacts. In addition to using foreign exchange contracts to hedge against teh US denominated debt exposure, Bonavista's revenue stream is naturally hedged as North American crude oil and natural gas benchmark prices are denominated in US dollars." The 2014 Annual Report shows US$53m due 2020 hedged at 0.995, and US$16m due 2022 hedged at 0.995.
From the 2018 Annual Report: $US160m due 2020 is hedged at 1.3049 (77 cents like I understand it) and US$50m due 2022 is hedged at 1.3012 (77 cents).
What happened? How did our hedge deteriorate so badly? Did we cash in our 2013 hedge contracts before they matured?
Also, I think it is wrong to think that just because oil and nat-gas is priced in US$ that you are naturally hedged. First of all, Bonavista sells gas, not oil. So why did Bonavista mention WTI as a natural hedge. But if they meant it, then what about the fact that oil is priced in USD but the price of oil is not determined by US consumers. You can show by graphing WTI vs the USD/basket-of-currencies F/X rate that as the USD strengthens, WTI weakens. THERE IS NO NATURAL HEDGE!
My conclusion on the USD Debt is that I am suspicious that Bonavista management made a rookie mistake on currency hedging. But without analysing every annual report from 2010 to 2018, I cannot be sure. And that analysis is not worth my while. The horses have already left the barn.