Energy Bonds Rally as Canadian Natural, Talisman Lower Debt: Canada Credit
Bonds of Canada’s energy companies are outperforming the broader credit market as they trim debt and rising oil prices bolster earnings following last year’s recession.
The 10 biggest Canadian oil companies by revenue will slash their combined debt 11 percent to C$46.9 billion ($44.8 billion) by year-end from 2008 levels, according to Peters & Co., a Calgary-based investment bank. Canadian Natural Resources Ltd. will lop the most from its balance sheet, reducing its debt by about 33 percent to C$8.89 billion.
Bonds of companies in the nation’s energy industry have returned 6.9 percent this year, including reinvested interest, compared with 5.5 percent for Bank of America Merrill Lynch’s broad Canadian Corporate Index. Investors bid up the securities as New York oil futures more than doubled to about $78 a barrel from $32.40 in 2008, allowing companies burned by the sudden drop in oil prices and seizure in credit markets two years ago to trim their obligations as a hedge against another decline if the global economic recovery slows.
“There’s a general caution based on what happened two years ago,” said Kam Sandhar, lead oil and gas analyst with Peters. “Companies aren’t willing to lever up until they see some opportunity for an acquisition or a project.”
Elsewhere in credit markets, the extra yield that investors demand to own corporate bonds rather than the nation’s government debt narrowed to 143 basis points, from 145 the day before, Merrill Lynch index data show. The spread is the narrowest since it reached 142 basis points, or 1.42 percentage point, on July 27.
Canada sold C$3 billion of two-year notes, drawing an average yield of 1.524 percent. The government received bids of C$7.6 billion for the 1.5 percent securities maturing in December 2012, according to a statement yesterday on the Bank of Canada’s website.
Opti Canada Inc.’s bonds fell to the lowest in 11 weeks after the Calgary-based investor in oil-sands projects said it was selling $400 million of new debt. Standard & Poor’s lowered its rating on Opti to CCC+ from B-.
S&P raised its rating on Air Canada, the country’s largest airline, to B- from CCC+ after the company sold $1.1 billion in secured notes to increase liquidity.
Rogers Communications Inc. said it priced an offering of C$800 million aggregate principal amount of 6.11 percent senior notes due 2040. The notes were priced at C$999.04 per C$1,000 principal amount for an effective yield of 6.117 percent per annum if held to maturity.
Energy producers are selling assets to slash debt and reposition themselves through new acquisitions. Talisman Energy Inc. cut its net debt to C$1.3 billion at the end of the second quarter from C$2.1 billion at the end of 2009. Paring debt has left the company the flexibility to pursue acquisitions such as its $1.9 billion purchase of oilfields in Colombia from BP Plc, announced Aug. 3.
Talisman Chief Executive Officer John Manzoni, the former head of BP’s refining unit, sold assets and used increased revenue to stockpile cash for acquisitions.
“This balance sheet strength will allow us to continue to pursue organic growth or take advantage of acquisition opportunities that may arise,” Manzoni said on Talisman’s second-quarter earnings conference call July 27.
Higher oil prices have allowed Canadian Natural to steer clear of debt markets for more than a year.
“I think there are lots of opportunities if you in fact have to borrow money,” said John Langille, vice chairman of Calgary-based Canadian Natural. “We don’t have to and we haven’t been in the market place for debt in a long time.”
Canadian Natural, the nation’s second-biggest oil producer by market value, is reaping profit from its Horizon oil-sands project, said Lanny Pendill, an analyst at Edward Jones & Co. in St. Louis. It makes sense for companies with excess cash to pay down debt, particularly after the credit crunch, he said.
“It’s prudent to get the debt balance lower because you don’t know what the future is going to hold,” said Pendill, who rates Canadian Natural “buy” and doesn’t own the stock. “If there were to be a double-dip recession, you’d want to be able to withstand that.”
Gas producers such as Encana Corp. and Talisman have maintained revenue through hedging production and drilling throughout North America, where they can take advantage of stronger regional prices and lower costs to ship the fuel to customers. The 17 percent gain in the Canadian dollar relative to the U.S. currency in the past 20 months has also reduced borrowing costs on U.S. dollar-denominated loans.
Still, debt levels aren’t likely to return to the highs of three years ago, Sandhar said.
“Credit markets have changed a lot,” Peters’s Sandhar said. “Access to debt is not as good as it could be.”