Barrick Gold's Energy Hedge: Buy an Oil Company (ABX)

With energy prices on a seemingly never-ending upward trend, it makes sense to hedge against future price increases in any available manner. Barrick Gold Corp. (NYSE:ABX) proposed to do just that by offering C$6.00/share for small Canadian oil firm Cadence Energy (TSX:CDS). Cadence currently produces about 3,600 boe/day, and it’s proved reserves are estimated to be 18.2 million boe, or about 13.8 years worth at current production rates. The offer is worth C$354 million to Cadence shareholders.

Barrick’s offer hedges about a quarter of the company’s oil consumption and "a significant portion" of its natural gas consumption. Barrick’s CFO estimated the acquisition cost at approximately $20/boe.

This is a clever move on Barrick’s part. It hedges the company’s energy costs at a lower rate than the forward market pricing, and the company estimates that it breaks even on cash flow even in the event that oil prices drop to less than half the current market price.

The offer is open for 35 days, and requires both regulatory approval and acceptance by two-thirds of Cadence’s stockholders. Cadence stock closed at $6.16 on the Toronto exchange yesterday, and Barrick shares gained more than a buck yesterday, up more than $6.00 in the past 5 trading days.

With Barrick having a $45 Billion market cap, this is a small drop in the bucket for the company.  Maybe the airlines, truckers, and other transportation companies should band together and make an oil purchase of their own.

Paul Ausick
July 15, 2008