If you would like to ask our webinar guest speakers from WS Blue Whale Growth Fund, Taseko Mines, Kavango Resources and CQS Natural Resources fund a question please submit them here.
What are you rabbiting on about - i3e only drilled 11 (8 net wells) last year and 3 (2.5 net) were in Clearwater.
Also from the last RNS:
The total 2023 capital expenditures of approximately USD 30 million (unaudited) served to efficiently delineate and develop its CORE areas of Central Alberta, Wapiti and the CLEARWATER.
“Tony, ask yourself why did both parties go through all the effort to transact on i3’ one Clearwater well in Martin Creek.”
Funny enough I did ask that question including why a Company with 680 net sections and over 65,000 boepd of production would buy just one well and also why i3e that’s been busy adding to its acreage in clearwater suddenly be selling in Martens Creak of all places which happens to be amongst the best acreage in Clearwater.
My conclusion was that I3e wouldn’t ordinarily be doing this and this is housekeeping and a one off. sale – i3e have some isolated sections that are surrounded by other competitors land . My guess is that Tamarack have adjacent sections and bought this well to make their operations more contiguous.
Also, these asset transfers are happening all the time – i3e is in the process of transferring 8 wells to Axiom Energy along with Acquiring 1 facility and 2 pipelines from BTG Energy Corp – so quite why Canuck is making a big song and dance about this one well to Tamarack – I’m puzzled.
From i3e’s November corporate presentation:
“Near-Term Focus:
• Accelerate development at Dawson and Cadotte based on initial de-risking activity and success of offsetting operators
• Continue advancing delineation of extensive undeveloped land positions (Marten Creek, Walrus and Seal)”
And from i3e’s website:
“In Marten Creek where access is restricted, i3 has negotiated unfettered use of a large inventory of surface pads and more than 150 km of third-party pipeline infrastructure, which can be utilised to minimise future capital requirements as efforts shift to potential oil development.”
It sounds to me like Clearwater / Martens Creeks is considered "core" - but hey ho - I could be wrong.
Since we have zero qualms about posting rubbish - its 1 well you Wally !
A pretty optimistic take on things
https://bnnbreaking.com/finance-nav/i3-energy-hits-record-production-in-2023-navigating-through-commodity-price-challenges
Nomad,
What you have written reads well and i'm sure there are a few on here nodding their head in agreement/approval. But your post is actually factually incorrect. Hedging is also one of those things that it’s much easier to be smart after the fact.
Are you sure about i3e’s hedging policy – I don’t ever recall seeing this as stated policy – my recollection of the policy is to hedge up to 50% of production on a rolling basis.
A bit of context before I get into the fact checking - Oil was at or above $120 for only 4 days I think in 2022. The highest oil prices were in the middle of the year 2022 with the highs in June and the average over the 5 months from March to July of $106 - the remaining months trending down to $76 in Dec 2022.
1) I've pulled the numbers below from the 2022 Interim report which covers the 6 months ending 30 June 2022. Both Oil & Gas are more than 50% hedged in the highest price environment in years and more hedging than is in place now – this appears to contradict your comments on hedging policy.
2) The pricing of the hedges is even more interesting – in January 2022, oil averaged $83/bbl climbing steadily to average $113 in June yet the hedges they were able to place for Q3 & Q4 were at CAD 94.15 / bbl ($70)
3) Gas pricing tells a similar story – they hedged at CAD 3.85 / GJ in spite of the fact the fact that gas averaged closer to CAD 5.80 in H1 2022
So its pretty obvious that hedges are not based on temporary price spikes or what the price maybe on any given day – it’s a bit more complex than that. Its worth mentioning because I recall when the gas price spiked to CAD 14.00 in January for a few days – there a were a few here and on other BB’s saying – I hope i3e are busy loading up on gas hedges !
2022 (Q3&Q4)
Gas 6,897,325 GJs CAD 3.85/GJ
Oil 230,000 bbls CAD 94.15/bbl 414,000 bbls CAD 92.20/bbl
Propane 92,000 bbls USD 46.93/bbl
El Steve,
“You also say that the NOI is based on the spot and not the hedged price however that is an issue for the i3 accounts department to clarify,”
I more than say - I know because my spread sheet is is in alignment with I3E’s accounts . I3E’s accounts are audited so I have a high degree of confidence they comply with applicable accounting standards.
If you doubt this - it’s not up to i3e - it’s up to you to clarify with i3e.
I agree that NOI is not one of the the best metrics because as an investor you are more interested in cash generation or more specifically free cash flow. As Buffet says - Free Cash Flow is the gold standard - many of these non gap measures are smoke and mirrors. Also NOI hides the fact that I3E’s SG&A is on the high side.
I check my model against I3E’s results both interim and FY. I check all line entries including revenues, of all streams, royalty, opex, SG&A etc - what it tells me is that the market price is used to calculate revenues and hedging loses / gains are deducted lower down in the accounts like SG&A, debt repayments etc to arrive at profits , FCF etc. I believe all is per the applicable accounting standards and applied by I assume all I3E’s peers but NOI appears to be Unique to I3E.
Elsteve,
"To put it simply you correctly say that the profit or loss on the hedge is irrelevant."
Firstly and Simply put you are not correct - to many PI's its not irrelevant because they dont fully understand the hedging , both the quantity and how they work . Also I3e's quarterly update / guidance only provides a figure for NOI which EXCLUDES the impact of hedging and all other major costs except opex and royalties so you only get to see the impact on i3e's profits and free cash flow etc in the interim report and final reports issued twice a year 3 - 6 months after the cut off period when they include a figure for hedging gains or losses. Profits and losses impact share price !!!
Secondly - the accounts don't agree with you - they classify it as a loss or a gain and not a technicality or a notional charge.
Thirdly - intuitively many PI's here I would speculate to say would consider that selling oil at $70 when the market is $80 is a loss even though you may have entered into the hedge many months before the oil is sold at $70. And just to reiterate the first point - NOI guidance is based on the $80 and not the hedged price.
Fourthly - You have the option of going unhedged, 20% hedged such as i3e in Q2 (Gas) or 85% hedged such as DEC or any other combination . All of these decisions have a massive impact on profitability.
Apologies Spike - should have not made the Coconut comment - you have been reasonably polite with your comments - I should have been equally polite.
your being extremely pedantic spike - my target audience is fellow posters here and not the i3e bod who obviously figure hedges into projections.
"whether the size of the hedge impact is a loss of $1billion or gain of $1billion it makes very little difference for the end result which was already determined"
that is just bat **** crazy - of course it makes a huge difference whether you are making a 1 billion loss or 1billion gain on hedges - it brings up the whole question whether you should hedge at all or whether you are 20% hedged as i3e is in q2 (gas)or you are 85% hedged as are other companies such as diversified energy. i'm going to leave it there as it feels like i'm talking to a coconut.
I must say - a very positive presentation - several transformative projects. I get the sense that EQ is the pick of the larger projects due to the more favourable environment.
I thought Will Holland answered the questions very well and apparently news on the Cloughton drilling pad shortly - "watch this space"
Looking at the positive effect of hedging - February is nearly done and by my calculation - i3e have made a hedging gain of about $700,000 on its gas partially offsetting the weak AECO pricing.
But if its only "notional" - I have a good mind to email Majid and ask him to hand the money back !
Its real accounting Spike and not "hedge accounting" - and I would add particularly from the average Joe Blows perspective.
If Oil was to shoot up to $90 a bbl tomorrow - many of us here would be focused on the $90 but forget the impact of hedging on profits / free cash flow. So in i3e's case being 55% hedged - they would in effect be getting something a little under $80 per average bbl rather than the $90. $78 is no where near as sexy sounding as $90 though its still pretty good !
Looking at the Gas Hedges:
In Q1 they have hedged 2,275,000 GJ at CAD 3.04 - a fantastic hedge considering that AECO is currently sitting at about CAD 1.60
2,275,000/90 days = 25,300 GJ/day of production hedged
They don’t make it easy for you as the hedge is priced per GJ but production in given in mcf – but easy to get the conversion factor off the internet.
25,300 / 1.05 = 24,070 mcf/day hedged
24,070/63,894 = 38%
So 38% of gas production is hedged in Q1. The volumes in Q2 and Q3 are considerably less at around 20% but at a pretty decent price of CAD 2.52 / GJ
I suspect the reason they are not more hedged in Q2 & Q3 is that by the time they would normally have added hedges – the pricing was too low so they decided to stick to 20% and try to maximise the potential upside if and when gas prices rise.
"Not wanting to kick off any more hedging debates, but does anyone know how much gas and oil has been hedged as a % of our 2024 production" - Does anyone bother reading the RNS's properly - FFS - its all in there in no more than 3 or 4 pages !!!
So for the benefit of those that are not sure how the hedging works (and not those that are too lazy to read the RNS for themselves)
i3e have hedged about 210,000 bbl of Oil in Q1 2024 - look at the table in the RNS - 189,750 bbl in swaps and 22,750 bbl in costless collars.
That's 210,000/90 days = 2300 bbl / day hedged out of 4155 bbl/day total oil production or 55% hedged. The swaps are priced at CAD 95.89 / bbl (or $71) meaning that whether Oil is $90 or $10 per barrel - i3e is getting $71 / bbl on 55% of its production.
If you look at Q2 - a very similar volume is hedged but at a slightly higher price of CAD 98.45 / bbl.
For Q3 and Q4 the volumes hedged are substantially less, however, it is likely that i3e will be adding hedges over the coming weeks / months so Q3 & Q4 will end up being similarly hedged at around 50%.
So just picking up on the earlier discussion about whether hedging losses/gains is a "notional accounting entry only". The hedge can be a physical hedge i.e. you've agreed with a purchaser to sell oil at the hedged price of $71 (even if the market price in $80) or it can be a financial hedge where you sell to the purchaser at the market price ($80) but then separately have to pay out $9 ($80 - $71) to a financial institution for having that price guarantee (hedge). The net effect is identical - i.e. you only earn $71 on the barrel. So its a very real loss or gain and this exactly how it is shown on the Income statement in the Company Accounts - so notional accounting entry my a$$ !
Anyway - new topic - anyone have any idea what the "none core assets" maybe as referenced in the RNS?
"The spot price situation has changed since those hedges were set"
- correct but Oil and Gas Prices change every day as do the pricing of hedges. So my comment was that "as of the day a hedge is set" - this is more accurate than anything your average Joe Blow forecast but obviously has to be re-evaluated as prices and hedges change. A hedge placed today for WTI delivery in May 2024 will be priced differently from a hedge placed next month for the same delivery - most people here I think understand that.
"And again you are wrong thinking the financial institutions setting the hedge prices are doing so based primarily upon their forecasts of future oil prices"
Your putting words into my mouth - I didn't say "primarily upon their forecast" - these are your words. But they cannot be strictly using "the futures markets" otherwise all hedges placed at a 9am monday the 29th February would all be at the same price and they are not. A bit like the bookies - odds should be similar but not exactly the same.
"they aren’t, they are tying the futures market and making money on the spread not the risk."
as a general statement - this is nonsense - the spread on a swap includes the risk premium. Anyway - beer time !
Spike,
I said my last word - so i will only break it partially and respond to your first point only - suffice to say I disagree with a big chunk of what you say and I think you are talking semantics:
1) "The hedge contracts are physical delivery contracts...."
- this is not correct. If you look at i3e's hedges (check their reports) - the're a combination of physical and financial hedges - the financial hedges get settled in cash.
"The accounting loss that is booked is the notional difference between the spot price and the hedge price. It’s an accounting booking only, there is no cash movement"
This is not correct in the case of financial hedges and even in the case of "physical delivery" - you are talking semantics. Whilst its true no cash changes hand in this instance you are effectively getting $65 on the barrel for example where if you went unhedged you would be getting $70 - effectively a "LOSS" of $5 on a barrel and this is exactly how it is recorded on the Income Statement i.e. a loss or a gain depending on which way oil moves.
And finally - this was not even what we were really talking about - my original comment was that imo - a hedge placed today by i3e for say WTI in May is likely to be priced more accurately or at least with more thought process than anyone on here's forecast. It may not be right - but a bit like the bookies - they are more right than wrong !
thats it Spike - i'm done !
Spike,
My last post on this subject since it appears we will have to agree to disagree:
1) i3e lost $25m in 2022 on hedging - that's a fact - it in their audited accounts. The loss is ABSOLUTELY not "a notional accounting entry". This is a real cost and cash they have paid out to the entities providing the hedges !!
2) For i3e to lose $25m means that a counterparty/counterparties have gained $25m - this is just common sense - the money just doesn't disappear into thin air.
3) Most Oil Companies will hedge like i3e - i.e. with options or swaps that guarantee a minimum oil price for hedged volumes - i.e. they cannot pass off the counter trade to other Oil Companies. Hence the majority of the Counterparties will be making money on whether they get the hedge right, not on whether they make money selling physical oil and gas. So for these companies, whether they be hedge funds, bank trading arms, commodity traders etc and they provide a swap for AECO CAD 3.00 - for them to make money AECO has to trade above CAD 3.00.
4) "You just have to look back at historical hedge prices I3E had to see how ‘wrong’ they were." So i'm not sure exactly what you are saying here as I don't know who "they" are. But this is part of my point - i3e's expertise is producing Oil & Gas and not hedging / predicting the future price of Oil & Gas. But the companies that provide the hedges are experts - their profits or loses depend on it !
5) and to defend i3e - I just looked at my spread sheet for 2023 which I estimate i3e made £2,600,106 profit on their hedges. So their hedges were pretty good in 2023 and they look pretty good so far in 2024.
"It’s is CATEGORICALLY not the BANK gambling SUBSTANTIALLY on future commodities prices,. The commodity traders will be more actively buying and selling the hedges as they form their own assessment of future prices, but commodity traders MAINLY make money on volatility not absolute prices."
Sound like you are agreeing with me! First of all, I did not “CATEGORICALLY” state that the counterparty is only a bank - It could be a Hedge Fund, Bank, Trading House or other.
Some banks have trading arms and I believe that your use of the word “substantially” acknowledges the fact that trading arms may place at least “some” speculative bets on the future price of commodities. Likewise with your use of the word “mainly” acknowledges the fact that trading houses may indeed place “some” bets on the future price of commodities even if their strategy is based more on volatility.
When a counterparty places a hedge – it’s a speculative bet on the movement of Oil & Gas prices. i3e lost around $25m on hedges in 2022 and they are a small player in Canada - total hedging losses / gains are in the billions - so for you to say that there is "very little speculative risk" is absolute nonsense. There is lots of money to be made by hedging Oil & Gas with numerous instruments / strategies.
In effect, the hedged price is an agreement between Company and Counterparty what the fair price is of a Commodity at some point in the future - so if the hedged price for AECO is CAD 3.00 for example that is a consensus view of informed Industry Insiders. It’s not infallible but like the bookies - trading houses / hedge funds/banks etc will be right more times than the average punter.