Published On: September 25th, 2023
Calima Energy Limited (ASX: CE1 / OTCQB: CLMEF) (“Calima” or the “Company”) is ready to take advantage of growing energy prices along with securing any downside volatility from buying the PUT option under the corporate risk management strategy.
Figure 1: WTI USD & CAD vs. USD/CAD Exchange Rate
The price the Company earns for selling its oil production is closely correlated with the benchmark price for Western Canada Select (WCS), which trades below the price for West Texas Intermediate (WTI). WTI-WCS differential hedges and West Texas Intermediate (WTI) benchmark hedges have been used in the company’s hedging strategy.
Calima Energy’s strategy is to stack on additional hedges for three quarters and hedge up to 50% of its projected production out of one quarter. Purchases of PUT spreads and, in rare circumstances, participation in zero-cost collars are the main methods used to accomplish this. This approach of buying PUT options enables the Company to continue participating in the rise of WTI prices while taking precautions against WTI price declines. Additional hedges will be added over the upcoming quarter once output from the Pisces Glauconitic Programme (Pisces #10, #11, and #12) is known.
The Company, until now, has hedged about 34% of its after-royalty oil production for September to December 2023 by purchasing PUTs at a weighted average floor price of WTI of around ~ USD 77 per barrel. Currently, the average price of the PUTs is USD 1.90 for each delivered barrel.
Moreover, except for the 250 bbl/day collared in Q4, this hedging policy offers full participation in WTI price increases up to a maximum of USD 97.10/bbl.
As discussed in quarterly activity updates published on July 31, 2023. The West Texas Immediate (WTI) rose above USD 80 per barrel, and the Western Canadian Select (WCS) differential fell from USD 28 to USD 14; revenue targets looked promising.
Figure 2: Current WCS Differential Hedges
Figure 3: Current WTI Crude Oil Hedges in Place
About Calima Energy Limited
Calima Energy Limited is an oil & gas producer dedicated to ethically exploiting superior resources in Western Canada. It leads the way in developing the energy sector as an ecologically mindful resource explorer. The Company released the power of partnership through a revolutionary merger with Blackspur Oil in 2021. As a result, it developed into an oil and gas producer with strong margins sensitive to WTI prices. With a low decline rate of 65%, the Company produces consistent amounts of conventional oil and gas mainly from its Thorsby and Brooks assets. As production doubles within 18 months, these assets have massive room for expansion.
Calima Energy also owns approximately 34,000 acres of Montney rights in the “liquids-rich” fairway in addition to the Thorsby and Brooks holdings. The Montney assets, renowned for having an abundance of liquids, have a potential upside in the domestic gas and international LNG markets. Because of its significant acreage, Calima Energy is in a solid position to take advantage of the Montney Formation’s potential and the rising demand for liquid-rich natural gas.
Figure 4: Major Projects of Calima Energy Limited
Calima Energy Chairman Glenn Whiddon
Mr. Glenn Whiddon, Chairman of Calima Energy Limited, has a rich background in equity capital markets, banking, and corporate advisory, focusing on the natural resources sector. Holding a degree in Economics, Mr. Glenn Whiddon has extensive experience in corporate leadership and management roles.
Presently, Mr. Glenn Whiddon holds Director positions in numerous publicly listed Australian and international companies operating within the resources sector.
Formerly, Mr Glenn Whiddon served as the Executive Chairman, Chief Executive Officer, and President of Grove Energy Limited. This company was involved in oil and gas exploration and development across European and Mediterranean regions, spanning Italy, Romania, Slovenia, Tunisia, and the UK and Dutch North Seas. Under his guidance, Grove Energy underwent a significant transformation.
Investor’s Outlook
- Calima Energy has implemented a hedging strategy using bought PUT options to gain exposure to rising oil prices while protecting its revenue against potential price weaknesses. This strategy can provide stability to the Company’s income stream.
- The Company plans to layer on additional hedges in the next quarter, contingent on production from specific programs. This indicates that Calima Energy is actively managing its risk exposure and staying proactive in its risk management efforts.
- With the price of CAD WTI oil trading at around CAD 120 per barrel and WTI at USD 92 and a USD/CAD exchange rate of 1.36, it is a terrific moment to be a Canadian energy producer.
- The well drilling expenditures for Pisces #10 and #11 are under budget, and the drilling findings to date have been quite positive. This suggests a potentially positive financial outlook for the company.
- Calima Energy’s share price stood at AUD 0.089 per share as of September 21st, 2023, with an average 52-week range of AUD 0.082 to AUD 0.150 per share.
- The Company’s market capitalisation stood at AUD 55.60 million as of September 21st, 2023.
- The free cash flow ratio of the Company stands at 1.68, which is 59.48% of the free cash flow yield.
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