Western Oil Sands options buyers gamble on $90 crude
The Globe and Mail: Western Oil Sands options buyers gamble on $90 crude
By PATRICK BRETHOUR
Tuesday, October 4, 2005 Page B5
CALGARY -- In another sign of bullish sentiment for crude prices, Western Oil Sands Inc. has sold speculators the right to buy a large portion of its production -- for upward of $90 (U.S.) a barrel.
Western, a 20-per-cent owner of the Athabasca Oil Sands Project, yesterday announced that it will hedge much of its output in 2007-09, to ensure that it has enough cash to pay its share of a contemplated $17-billion expansion over the next decade.
The Calgary-based company has purchased hedges that guarantee it a floor price of $52.42 a barrel for 20,000 barrels of daily production from Jan. 1, 2007, through to Dec. 31, 2009.
To defray the cost of those hedges, it has also sold call options that give the holders the right to buy oil at prices ranging from $90.50 a barrel to $94.25.
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In purchasing those options, the buyers are placing bets that oil prices will rise at least that high, giving them the opportunity to buy comparatively cheap crude in what would be the kind of "superspike" energy crisis that some analysts are predicting.
Exercising those options is pointless if oil prices are lower than the strike price.
David Dyck, senior vice-president and chief financial officer, said that until very recently, he would not have believed that anyone would bet on oil prices approaching $100. "A couple of years ago, this would have been unheard of," he said.
The hedging program wasn't the only bullish news yesterday. FirstEnergy Capital Corp. boosted its forecast for crude prices yesterday, raising its prediction for this year to $59 a barrel from $53; for 2006, to $71 from $60; and for 2007, to $63 from $61.
Analyst Martin King wrote in a report that high prices will crimp demand, but only after crude has stayed costly for a protracted period of time.
The buyers of Western's call options may be betting on prices, but from the company's point of view, the purpose of the exercise is far from speculative.
Mr. Dyck said the hedges represent more of an insurance policy for Western, allowing it to go ahead with expansion even if oil prices fell substantially.
While no decision is to be made until the middle of next year, the AOSP partners are contemplating capital spending of $4-billion to $4.5-billion in each of four phases over the next 10 to 12 years. Each of those phases would add daily production of between 90,000 barrels and 100,000 barrels, about half the size of the AOSP's current operation, once efforts to increase its efficiency are completed over the next three years. The project's output could rise as high as 600,000 barrels a day by 2017.
Western says it can make an attractive profit if prices are at $40 a barrel, and that its hedging program guarantees it a selling price of about $49 a barrel, once the cost of the hedges is accounted for. (The call options reduce that cost to an average of $3.74 a barrel.)
Mr. Dyck said the hedging program will go ahead regardless of whether the expansion garners approval, noting that the production being sold is from the current operations of the project.
Western's majority partner, Shell Canada Ltd., said it does not see the need to set up hedges, as it did in the construction of the original AOSP, in part because its cash flow and balance sheet are now robust enough to withstand commodity price fluctuations.
Canadian Oil Sands Trust, largest owner in the Syncrude Canada joint venture, said it has no plans to hedge, noting that it has no immediate plans for major capital expenditures.
By PATRICK BRETHOUR
Tuesday, October 4, 2005 Page B5
CALGARY -- In another sign of bullish sentiment for crude prices, Western Oil Sands Inc. has sold speculators the right to buy a large portion of its production -- for upward of $90 (U.S.) a barrel.
Western, a 20-per-cent owner of the Athabasca Oil Sands Project, yesterday announced that it will hedge much of its output in 2007-09, to ensure that it has enough cash to pay its share of a contemplated $17-billion expansion over the next decade.
The Calgary-based company has purchased hedges that guarantee it a floor price of $52.42 a barrel for 20,000 barrels of daily production from Jan. 1, 2007, through to Dec. 31, 2009.
To defray the cost of those hedges, it has also sold call options that give the holders the right to buy oil at prices ranging from $90.50 a barrel to $94.25.
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Mortgage Rates
Compare national rates by lender: See Chart
In purchasing those options, the buyers are placing bets that oil prices will rise at least that high, giving them the opportunity to buy comparatively cheap crude in what would be the kind of "superspike" energy crisis that some analysts are predicting.
Exercising those options is pointless if oil prices are lower than the strike price.
David Dyck, senior vice-president and chief financial officer, said that until very recently, he would not have believed that anyone would bet on oil prices approaching $100. "A couple of years ago, this would have been unheard of," he said.
The hedging program wasn't the only bullish news yesterday. FirstEnergy Capital Corp. boosted its forecast for crude prices yesterday, raising its prediction for this year to $59 a barrel from $53; for 2006, to $71 from $60; and for 2007, to $63 from $61.
Analyst Martin King wrote in a report that high prices will crimp demand, but only after crude has stayed costly for a protracted period of time.
The buyers of Western's call options may be betting on prices, but from the company's point of view, the purpose of the exercise is far from speculative.
Mr. Dyck said the hedges represent more of an insurance policy for Western, allowing it to go ahead with expansion even if oil prices fell substantially.
While no decision is to be made until the middle of next year, the AOSP partners are contemplating capital spending of $4-billion to $4.5-billion in each of four phases over the next 10 to 12 years. Each of those phases would add daily production of between 90,000 barrels and 100,000 barrels, about half the size of the AOSP's current operation, once efforts to increase its efficiency are completed over the next three years. The project's output could rise as high as 600,000 barrels a day by 2017.
Western says it can make an attractive profit if prices are at $40 a barrel, and that its hedging program guarantees it a selling price of about $49 a barrel, once the cost of the hedges is accounted for. (The call options reduce that cost to an average of $3.74 a barrel.)
Mr. Dyck said the hedging program will go ahead regardless of whether the expansion garners approval, noting that the production being sold is from the current operations of the project.
Western's majority partner, Shell Canada Ltd., said it does not see the need to set up hedges, as it did in the construction of the original AOSP, in part because its cash flow and balance sheet are now robust enough to withstand commodity price fluctuations.
Canadian Oil Sands Trust, largest owner in the Syncrude Canada joint venture, said it has no plans to hedge, noting that it has no immediate plans for major capital expenditures.
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