CANADIAN OILPATCH / HEDGING PRICES
Mentioned before how some companies are getting hit because of
hedging oil prices at what one time were thought to be good prices.
Companies are experiencing more hurt other than by kicking
themselves in the butt.
Friday, November 1, 1996
Petro-Can hit by hedging strategy, price wars
Petro-Canada posted poor third-quarter earnings yesterday, due to dismal downstream results and unlucky hedging on the price of oil.
ÿWhile revenue rose to $1.344 billion from $1.195 billion for the three months ended Sept. 30, profit dropped to $24 million (8› a share) from $79 million (32›) in the same quarter last year.
ÿCash flow for the third quarter fell to $182 million (67›) from $210 million (85›) in 1995.
ÿLike the other major integrated oil producers, Petro-Can's weaker results were expected.
ÿ"There are no surprises there," said Duncan Matheson, an analyst with Gordon Capital Corp. "They told everyone that they had to hedge. The worst [hedger] was Suncor Inc."
ÿAfter Petro-Can hedged the price it receives on half its oil production at just over US$18 a barrel, crude oil shot up to as high as US$25, its highest price since the Gulf War.
ÿ"Consequently, due to our hedging program, we weren't able to realize the full value of higher crude prices," said Petro-Can spokesman Bill Simpkins.
ÿThose hedging activities have cut profit for the first nine months of the year by $32 million.
ÿFor the integrated oil companies, margins on their downstream marketing and refining operations are affected significantly by changes in crude oil prices, because they buy as well as sell crude oil.
ÿ"So it usually makes sense for us to hedge on commodity prices," said Simpkins.
ÿSimpkins noted that Petro-Can is reviewing its hedging strategy, and has not yet made any major commodity hedges for 1997.
ÿLike the other integrateds involved in both the downstream as well as the upstream production side of the business, Petro-Can's downstream results dropped due to gasoline price wars, particularly in Quebec.
ÿPetro-Can's third-quarter earnings in the upstream producing sector dropped to $22 million from $35 million. In the downstream refining and marketing operations, earnings suffered more, falling to $23 million from $62 million.
ÿPetro-Can's stock (PCA/TSE) fell 10› yesterday to $18.15. |
